Question

On January 1, Year 1, the general ledger of a company includes the following account balances:

Accounts	Debit				Credit
Cash	$	25,800
Accounts Receivable		7,200
Supplies		5,100
Land		70,000
Accounts Payable					$	5,200
Common Stock						85,000
Retained Earnings						17,900
Totals	$	108,100			$	108,100

During Year 1, the following transactions occur:

January		2		Purchase rental space for one year in advance, $12,000 ($1,000/month).
January		9		Purchase additional supplies on account, $5,500.
January		13		Provide services to customers on account, $27,500.
January		17		Receive cash in advance from customers for services to be provided in the future, $5,700.
January		20		Pay cash for salaries, $13,500.
January		22		Receive cash on accounts receivable, $26,100.
January		29		Pay cash on accounts payable, $6,000.

7. Analyze the following features of a company financial condition:

a. What is the amount of profit reported for the month of January?

b. Calculate the ratio of current assets to current liabilities at the end of January.

c. Based a company financial profit and ratio of current assets to current liabilities, indicate whether a company financial appears to be in good or bad financial condition.

• Good

• Bad

Answer 1

1. Computation of profit for January:

	Profit for January:	Amount in $
1	Revenue:	27,500.00
	Expenditure:
2	Supplies	0
3	Rent	1,000.00
4	Salares	13,500.00
5	total expenditure	20,000.00
6=1-2-3-4-5	Profit for January:	13,000

**Since there is no information on the consumption of supplies, it is considered that they were intact.

2. Current ration calculation:

Current ratio= current assets/current liabilities

Current assets closing balance computation:

a. Cash:

		Particulars	Ampunt in $
1	Jan-01	Opeing balance	25,800.00
		Receipts:
2	Jan-17	Advance received from customers	5,700.00
3	Jan-22	Received form accounts receivable	26,100.00
		Payments:
4	Jan-02	Advace purchase of rental space	12,000.00
6	Jan-20	Salaries paid	13,500.00
7	Jan-29	Paid for accounts payable	6,000.00
8=1+2+3-4-5-6-7	Jan-31	Closing cash balance	26,100.00

b.supplies:

.Opeing balance = $5100

Purchased newly= $ 5,500

Closing supplies = opening + purchased - consumed = 5100+5500-0 = $10,600

c. Advance rent:

Advance paid = $12,000

rent for Jan = $ 1,000

Closing balance = 12000-1000=$11,000

d. Accounts receivable:

opening balance = $7,200

Rised During the year = $27,500

Received during the year = $26,100

Closing balance = Opening + raised - received = 7200+27500-26100 = $ 8,600

e = a+b+c+d

Total current assets = cash + supplies + advance paid + accounts receivable = 26,100+10,600+11,000+8,600

= $56,300

Current liabilities:

f. Accounts payable

Opening balance= $5,200

Incurred during the year = $5,500

paid during the year = $6,000

Closing balance = 5200+5500-6000 = $4,700

g.

Advance received = $5,700

h. Total current liabilities = f+g = 4700+5700 = $10,400

Current ratio = e/h = 56300/10400 = 5.41

3.Interpreting the current ratio:

The current ratio is the ratio between current assets and current liabilities

It measures the efficiency of the organization to serve its shore term obligations.

There is no best number for the current ratio since it varies from industry to industry.

Generally, a current ratio of 2 is considered good.

Since the form is having 5.41 as its current ratio, the company is having more than required and it is considered good.