In: Accounting
The following items are taken from the financial statements of SGB Company for 2013:
Cash |
$300,000 |
Accounts Receivable |
150,000 |
Inventory |
70,000 |
Accounts Payable |
13,000 |
Supplies |
20,000 |
Salaries Payable |
10,000 |
Unearned Revenue |
25,000 |
Intangible assets |
98,000 |
Property, plant, and equipment, net |
176,000 |
Common Stock |
50,000 |
Additional Paid-in Capital |
150,000 |
Retained Earnings, 12/31/2012 |
78,300 |
Long-term debt |
275,000 |
Service revenue |
483,700 |
Cost of Goods Sold |
170,000 |
Rent expense |
50,000 |
Supplies expense |
15,000 |
Insurance expense |
36,000 |
Instructions:
(1) Create a classified balance sheet in good form for the year
ended 2013.
(2) Calculate the current ratio and debt ratio and explain your findings.
Ans.1.
Balance Sheet of SGB company as on 31st Dec 2013
ASSETS |
2013 Amount |
LIABILITIES |
2013 Amount |
Current Assets; |
Current liabilties; |
||
Cash……………………………...$300000 |
Accounts Payable…………….....13000 |
||
Accounts Receivable………...150000 |
Salaries Payable…………….....10000 |
||
Inventory……………………….....70000 |
Unearned Revenue…...…25000 |
48000 |
|
Supplies……………………...……20000 |
5,40,000 |
Long-term Liabilitites; |
|
Property, plant and equipment; |
Long-term debt….....……275000 |
275000 |
|
Property, plant, and equipment, net……………………………….…176000 |
176000 |
Total Liabilties |
3,23,000 |
Intangible assets; |
Stockholders' Equity; |
||
Intangible assets………….….98000 |
98000 |
Common Stock……..…….50000 |
|
Additional Paid-in Capital…................150000 |
|||
Retained Earnings (see the below statements)……………… 291000 |
|||
Total Stockholders' Equity |
491000 |
||
Total Assets |
$814000 |
Total Liabilities and Equity |
$814000 |
Note: Retained earnings is given as per 31-12-2012, so we need to calculate current year retained earnings. For that we need to prepare Income statement and Statement of retained Earnings.
Income statement of SGB company for the year ended 31st dec, 2013
Service revenue |
$483700 |
Cost of goods sold |
(170000) |
Gross Profit |
313700 |
Operating Expenses; |
|
Rent expense…………………….50000 |
|
Supplies expense………………15000 |
|
Insurance expense……………..36,000 |
(101000) |
Net income |
$212700 |
Statement of Retained Earnings of SGB company for the year ended 31st dec, 2013
Retained Earnings, 12/31/2012 |
$78300 |
Add; Net Income |
212700 |
Retained Earnings, 12/31/2013 |
$291000 |
Ans.2. Calculate the current ratio and debt ratio and explain your findings.
Current ratio = Current Assets / Current Liabilities
= $540,000/ $48000
= 11.25
Findings: Current ratio is a liquidity ratio which help us to know how easily the company will pay its current liabilities with its current assets. So here, 11.25 of current ratio indicates a high rate of liquidity of SGB company. It means company has current assets 11.25 times of liabilities.
Debt ratio = Total Liabilities / Total Assets
= $323,000/$814000
= 0.397
Findings: Debt ratio is a solvency ratio which help us to know how easily the company will pay its all liabilities with its Assets. So here, 0.397 of debt ratio indicates a low rate of leverage of SGB company. It means the SGB company has low risk on paying its liabilities.