Question

Question 2: Balance Sheet Build and Analysis

Q.Clean, a student run dry-cleaning service has the following financial information as of December 31, 2020:

• The cash ending balance for the year was $117,820

• Buildings & Equipment for the year was $91,350

• Accounts Receivables for the year was $31,510

• Common Shares for the year was $194,860

• Inventory for the year was $87,970

• Land for the year for the year was $281,490

• Accounts Payable for the year was $74,250

• Retained earnings for the year was $70,100

• Buildings & Equipment Accumulated Depreciation for the year was $40,000

• Wages payable for the year was $46,190

• Short-term debt for the year was $10,500

• Taxes payable for the year was $55,750

• Mortgage for the year was $60,010

• 10-year bond for the year was $20,500

• Interest Payable for the year was $37,980

1. Prepare a 2020 Balance Sheet for the company. Ensure you categorize your accounts into Current and Non-Current Assets/Liabilities, and Shareholders’ Equity.

2. Calculate the Net Working Capital and Quick Ratio of the company. Explain what these values are and what they are used for. Comment on the company’s financial position, based on the ratios you calculated.

3. In 2021, the company plans to purchase additional retail space in Ray Hall. This space will cost $100,000. Half of the purchase will be made in cash, and the other half will be added to the mortgage. Also, the company takes an additional $35,000 of short-term debt. Please answer the following questions:

1. Describe the effect that these transactions will have on the 2020 Balance Sheet.

2. Will this impact the Income Statement in any way? If yes, identify and explain the impact. If no, explain why there is no impact.

Answer 1

Answer:

Q2.

Preparation of Balance Sheet as on 31st December 2020.

Net Working Capital = Current Assets - Current Liabilities

Here Current Assets = $237,300

Current Liabilities = $284,680

Net Working Capital = $237,300 - $284,680 = $-47,380

Quick Ratio = (Current Assets - Inventory) / Current Liabilities

= ($237,300 - $87,970) / $284,680 = $149,330 / $284,680 = 0.52

Net Working Capital - Net working capital is the difference between current assets and current liabilities. This is an indicator of company's liquidity, short term financial health and it's efficiency to mitigate the short term liabilities. A positive working capital that means current assets more than current liabilities then the company has the potential to grow and invest. If the company has negative working capital means current assets less than current liabilities then the company can not mitigate it's short-term liabilities and may have trouble in growing. Also the company can go bankrupt.

In our current scenario, Q.Clean company has the negative working capital that means they can not meet there day to day expenses and the company doesn't have any future growth.

Quick Ratio - This ratio is an indicator of a company’s short-term liquidity position and measures a company’s ability to meet its short-term obligations with its most liquid assets. Liquid assets means those assets that can be quickly converted into cash with minimal impact on the price received in the open market. The quick ratio indicates a company's capacity to pay its current liabilities without needing to sell its inventory or get additional financing.

To measure liquidity, a quick ratio of 1 is considered to be the normal quick ratio. It indicates that the company is fully equipped with exactly enough assets to be instantly liquidated to pay off its current liabilities. A company that has a quick ratio of less than 1 may not be able to fully pay off its current liabilities in the short term, while a company having a quick ratio higher than 1 can instantly get rid of its current liabilities.

In our current scenario, Q.Clean company has the quick ration 0.52 which is less than 1 that means the company can not pay off its current liabilities in the short term.