Question

The following balance sheet (statement of financial position) is presented for Level Up Corporation.

Level Up Corporation
Statement of Financial Position
At December 31, 2020
Assets		Liabilities
Current		Current
Cash	$60	Accounts Payable	$100
Accounts Receivable	140	Loan Payable	20
Merchandise Inventory	250	Notes Payable	60
Prepared Expenses	10		180
	460
Non-current		Non-current
Property, plant & equipment (net)	330	Loan Payable	140
			320
		Shareholders’ Equity
		Preferred shares, 10% (8 shares)	120
		Common shares (50 shares)	250
		Retained earnings	100
			470
Total Assets	$790	Total Liability and Equity	$790

Level Up Corporation
Income Statement
For the Year Ending December 31, 2020
Net Sales (all on credit)	$800
Cost of Goods Sold	600
Gross Profit	200
Selling and Administration Expenses	100
Income from Operations	100
Interest Expense	20
Income before Income Taxes	80
Income Taxes	30
Net Income	$50

Additional information from December 31, 2019 statement of financial position:

Accounts receivable                            $180

Merchandise inventory                        200

Property, Plant and Equipment (net) 250

Retained earnings                                   80

Preferred shares                                  120

Common Shares                                  250   

Requirements:

1. Compute the following ratios, showing all work.

Current ratio

Acid-test ratio

Accounts receivable collection period

Number of days of sales in inventory

Debt to shareholders’ equity ratio

Return on shareholder’s equity

2. What do these ratios tell you about the Level Up Corporation?

Answer 1

1. Current Ratio= Current assets/current liabilities=$460/$180=2.56:1

• Acid test ratio={cash+ account receivables)/current liabilities=$200/$180=1.11:1
• Accounts receivables collection period= average account receivables* no of days/total credit sales=$160*365/$800=73 days
• No.of days of sales in inventory=average stock*365/cost of sales=$225*365/$600=136.875 days
• Debt to shareholders equity ratio=Total debt/total shreholder's equity=$320/$470=0.68
• Return on shareholders equity=net income/ shareholders equity*100=$50/$470*100=10.64%
• 2. Current ratio and acid test ratio are marginally higher than the standardised norms. So these are acceptable and are favorable.
• Accounts receivables and inventory turnover is very slow due to which there is higher probability of dead stock and bad debts. These ratios are unfavorable.
• Debt ratio is very low due to which company is unable to take advantage of trading over equity.

Do give your feedback!! Happy Learning :)