Question

Business Basics - Assignment 2

GLOBUS ENTERPRISES YEAR END BALANCES

Globus Enterprises Year End Balances
Owner’s Equity	$112,350
Revenue	$263,200
Wages expense	$121,800
Rent expense	$65,100
Supplies expense	$50,400
Miscellaneous expenses	$5,250
Cash	$81,200
Accounts receivable	$51,800
Supplies	$9,100
Prepaid insurance	$8,400
Land (fixed asset)	$29,400
Equipment (fixed asset)	$25,900
Accounts payable	$20,650
Notes payable	$43,050
Mortgage (long term)	$29,750

Assignment

Using the data in the table above, create a balance sheet for Globus’s operations as of yearend (December 31, 200X)

Using the data in the table above, create an income statement for the year being examined.

Analyze the financial statements using the following analytical tools:

Current ratio (What does this ratio tell us about Globus?)

Net working capital (What does net working capital tell us about Globus?)

Note: Net working capital is the difference between current assets and current liabilities.

Debt to equity ratio (What does this ratio tell us about Globus?) Note: To compute owners’ equity from the data supplied here, remember the fundamental accounting equation:

Assets = Liabilities + Owners’ equity

Leverage ratio (What does this ratio tell us about Globus?)

Return on equity (What does this ratio tell us about Globus?)

Answer 1

Globus Enterprise

Balance Sheet

For the year ended 31^st December, 200X

Assets	Amount (in Dollars $)	Liabilities and Capital	Amount (in Dollars $)
Cash Accounts Receivable Prepaid Insurance Supplies	81,200 51,800   8,400 9,100	Current Liabilities: Notes Payable Accounts Payable	43,050 20,650
Total Current Assets	150,500	Total Current Liabilities	63,700
Fixed Assets: Equipment Land	25,900 29,400	Long Term Liabilities: Mortgage Owners’ Equity	29,750 112,350
Total Fixed Assets	55,300	Total Long Term Liabilities	142,100
Total Assets	205,800	Total Liabilities and Capital	205,800

Globus Enterprises

Income Statement

For the year ending 31^st December, 200X

Particulars		Amount in Dollars $
Revenue	121,800 50,400 65,100   5,250	263,000
Expenses: Wages Supplies Rents Miscellaneous Total Expenses		(242,500)
Net Income		20,650

Analyze the financial statements using the following analytical tools:

Current ratio = Current Assets/Current Liabilities = 150,500/63,700 = 2.36

The company has a very high current ratio of 2.36, which means it has enough of cash and equivalents to meet its current obligations. In fact it has 2.36 times more current assets over 1 current liabilities. The company has sound liquidity, and needs to employ its liquid capital to generate more productivity.

Net Working Capital:

Net working capital is the excess of current assets over its current liabilities. In this case the net working capital is:

Current Assets – Current Liabilities

= $150,500 - $63,700 = $86,800

Globus has a positive net working capital of $86,800. Having a positive working capital and that too it is more than double the current liabilities. It is an indication of sound liquid position of the company, It may not face any liquidity crunch in the near future, and thus shows that it could be ready with the cash to grab any opportunity in its way.

Debt Equity Ratio:

Assets = Liabilities + Owners’ Equity            

$205,800 = $93,450 + $112,350

Debt to Equity Ratio = Debt/Equity

= Total Debt = 93,450

= Total Equity = 112,350

Debt/Equity Ratio = 93,450/112,350 = 0.83

Having a debt equity ratio of 0.83 means that every investor has a debt load of $0.83 on every $1 of investment. Since the ratio is less than 1 it means the equity holders can easily meet all of its debts, and is an indication that the company is financially sound and stable.

Leverage Ratio:

There are two leverage ratios:

Debt-Equity Ratio = Debt/Equity

Debt-Equity Ratio = 93,450/112,350 = 0.83

Equity multiplier = Total Assets/Total Equity

Equity Multiplier = 205,800/112,350 = 1.83

Remember that Total Assets is inclusive of debt. Let us see the formula

Total Assets = Debt + Equity

Since the equity multiplier is 1.83, it shows that the assets are funded more with equity than debt. The assets are having lesser contribution from debt than equity. Here, out of the total assets, $93,450 of the assets are funded with debt.

Return on Equity (ROE):

Finding ROE by DuPont Analysis:

ROE = Net Profit margin * Asset Turnover * Equity Multiplier

Net Profit Margin = 20,650/263,000 = 0.0785171

Asset Turnover = Net Sales/ Total Assets = 263,000/205,800 = 1.27794

Equity Multiplier = 1.83

ROE = 0.0785171 * 1.27794 * 1.83 = 0.183622 or 18.36%

ROE of 0.183622 means that for every $1 of investment, the shareholders have earned $0.183622.

Thus Globus Entertainment has a 18.36% rate of return on investment.

Looking at ROE and the above Current ratio and other leverage ratios, it is evident that the company needs to employ more of capital into the company so that it can generate better rate of return. The company has a lower leverage and also the liquidity is high. The company needs to work on employing its cash into the business and generate better rate of return.