Question

XYZ Co.’s summary balance sheets for 2017 and 2018 are below: XYZ Co. Balance Sheets 2017 2018

Cash 400,000 300,000

Accounts receivable 800,000 _________

(b) Net fixed assets 1,600,000 2,300,000 TOTAL ASSETS _________ _________

Accounts payable 250,000 300,000 Short-term debt 350,000 400,000

Long-term debt 800,000 800,000 Shareholders’ equity _________

(a) 1,500,000 TOTAL LIABIL. & SHAREHOLDER’S EQUITY _________ _________

Calculate the following: a) Shareholders’ equity in 2017

b) Accounts receivable in 2018

c) If XYZ Co. has a company policy to keep 100% of the net earnings (or net profits) at the end of each year as retained earnings, what was the net earnings in 2017?(Note: there is nothing missing or misleading in this question. The info on this page is sufficient to answer it.)

d) Did the liquidity of the firm get better or worse from 2017 to 2018? (2 pts) (Note: there is nothing missing or misleading in this question. The info on this page is sufficient to answer it.)

Answer 1

Balance Sheet of XYZ Co for Yr. 2017 & 2018

	2017	2018
Cash	400,000.00	300,000.00
Accounts receivable	800,000.00	400,000.00
Net Fixed Assets	1,600,000.00	2,300,000.00
TOTAL ASSETS	2,800,000.00	3,000,000.00
Accounts Payable	250,000.00	300,000.00
Short Term Debts	350,000.00	400,000.00
Long Term Debt	800,000.00	800,000.00
Shareholders' Equity	1,400,000.00	1,500,000.00
TOTAL LIAB. AND SHAREHOLDERS' EQUITY	2,800,000.00	3,000,000.00

ANSWERS :

a) Shareholders' Equity for Year 2017

Shareholders' Equity is calculated by subtracting total liabilities from its total assets, i.e,

Total Assets = 400,000 + 800,000 + 1,600,000 = 2,800,000

Total Liabilities = 250,000 + 350,000 + 800,000 = 1,400,000

Therefore, Shareholders' Equity for Year 2017 = 2,800,000 - 1,400,000 = 1,400,000

b) Accounts receivable in Year 2018

In a Balance Sheet, the total of Assets is always equal to total of Liabilities and Shareholders' Equity. In the given case, as the rest of the figures are given, we can use them to find Accounts Receivable.

Accounts Receivable = Total of Liab & Shareholders' Equity - Total of Assets(excluding Accounts Receivable)

Therefore, Accounts Receivable for Year 2018 = (300,000 + 400,000 + 800,000 + 1,500,000) - 300,000 - 2,300,000

= 400,000

c) In case of XYZ Co. who have a company policy to keep 100% of the net earnings (or net profits) at the end of each year as retained earnings, what was the net earnings in 2017 :

Retained Earnings are the portion of a business' profits that are not distributed as dividends to shareholders but instead reserved to be reinvested back into business. When a company plans to keep 100% of the net earnings,it is very easy to calculate net income from the balance sheet. All one needs to know is change in equity from one period to the next.

Therefore for Year 2018, Net Earnings would be difference between Shareholders' Equity of 2018 and 2017 ,i.e., 1,500,000 - 1,400,000 = 100,000

For Year 2017, to calculate retained earnings, subtract a company’s liabilities from its assets to get Shareholders' equity ,i.e, = 2,800,000 - 250,000 - 350,000 - 800,000 = 1,400,000

Due to lack of information as to how much of shareholders' equity is common stock, it is difficult to bifurcate the entire shareholders' equity specifically into retained earning and common stock.

d) Liquidity Ratios measure a company's ability to provide sufficient cash to cover its short term obligations (debt). The most common liquidity ratios include; the current ratio and the quick ratio.

The current ratio is calculated by dividing the Current Assets(in our case,Cash and Accounts Receivable) by the Current Liabilities (in our case, Accounts Payable and Short Term Debt). The quick ratio is calculated by dividing the Current Assets (excluding inventory) by the Current Liabilities.

Since, we do not have any Inventory data, the above two ratios will be considered one and the same.

Therefore, Current Ratio for Year 2017 & 2018 = Current Assets / Current Liabilities

For 2017 = (400000 + 800000) / (250000 + 350000)

   = 2.00

For 2018 = (300000 + 400000) / (300000 + 400000)

   = 1.00

As per working above, it can be concluded that the liquidity of the firm has reduced from 2017 to 2018.

(i)In general, a higher liquidity ratio shows a company is more liquid and has better coverage of outstanding debts. Whereas a reduction in liquidity ratio indicates that XYZ Co. may face difficulties in meeting short term obligations such as short term loans and creditors(Accounts Payables).

(ii)Low liquidity is when cash is tied up in non-liquid assets, or when interest rates are high, since this makes it expensive to take out loans. In our case, it can be due to increased investment in Fixed Assets in 2018, as seen in information given above.