Question

In: Finance

Asset Liabilities and owners equity Cash 600 Accounts Payable 700 Inventory 80 Notes Payable 200 Accounts...

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.

Solutions

Expert Solution

!. 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

Current Ratio is same as WCR

Current ratio = Current Assets/ Current liabilities

= 1080 / 940

= 1.1489

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

jeff jeffy answered 1 year ago

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