Question

In: Accounting

The following items are taken from the financial statements of SGB Company for 2013: Cash $300,000...

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.

Solutions

Expert Solution

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.


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