In: Finance
Asset | Liabilities and owners equity |
Cash 600 | Accounts Payable 700 |
Inventory 80 | Notes Payable 200 |
Accounts Receivable 400 | Current Maturing LTD 40 |
Fixed assets 1500 | Stock 1300 |
Accumulated Depreciation (90) | Retained Earnings 250 |
Total 2490 | Total 2490 |
Use the following balance sheet for Delta Company to answer the following 3 questions.
1.Which of the following statements is accurate in regards to Delta's financial position?
Delta's NWC suggests that solvency is a concern.
Delta's NWC suggests that the firm has a liquidity concern.
Delta's WCR suggests that the firm has a solvency concern.
None of the above
2.Find Delta's current ratio. Round intermediate steps and your final answer to four decimals.
3.Find delta's net liquid balance (NLB). Do not use dollar signs or words when entering your response.
4.Net working capital is best interpreted as a measure
of solvency.
True
False
PLEASE EXPLAIN, thank you.
!. None of the above
Net Working Capital, NWC = Current assets - Current Liabilities
Current Assets = Cash + Inventory + Accounts receivables
= 600 + 80 + 400
= 1080
Current Liabilities= Accounts Payable + Notes Payable + Current maturing LTD
= 700 + 200 + 40
= 940
NWC = 1080- 940
= 140
Working capital ratio , WCR = Current Assets / Current Liabilities
= 1080 / 940
= 1.15
NWC and WCR shows the liquidity of a company , not solvency. So statement 1 and 3 are wrong. NWC is positive. So company has enough current assets to meet short term obligations. So the company has no liquidity concern . So statement 2 is also wrong.
Liquidity is ability to meet short term obligation. Solvency is ability to meet long term obligations
2.
Current Ratio is same as WCR
Current ratio = Current Assets/ Current liabilities
= 1080 / 940
= 1.1489
3.
Net Liquid Balance, NLB = Current Financial Assets - Current Financial Liabilities
Current financial assets = Cash + Short term Investments ( no investment for this company)
= 600 + 0
= 600
Current financial liabilities = Notes Payable + Current maturing LTD
= 200 + 40
= 240
NLB = 600 - 240
= 360
4. False
NWC is a measure of liquidity. It measures how much current assets ( short term assets) are available to meet Current liabilities ( short term liabilities). It si not a solvency measure. Solvency measures if the company will be able to meet its obligations over long term