¶ … balance sheet is prepared identifying the items which should be placed in this statement.
Table 1; Balance Sheet
Assets
Current
Cash
Accounts receivable
Prepaid expenses
Inventory
Total current assets
Long-term (fixed)
Equipment
Total assets
Liabilities
Current
Accounts payable
Long-Term
Mortgage
Total liabilities
Equity
Total Capital (debt + equity)
Using the figures provided, identifying the relevant inputs, the income statement, also referred to as a profit and loss statement, can be created.
Table 2; Income Statement
Revenue
Expenses
Supplies
Wages
Rent
Misc. expenses
Total expenses
Profit
20,650
Question 3
Having prepared the balance sheet and income statement, it is possible to undertake a ratio analysis to assess the condition of the firm.
Part A The current ratio is calculated by taking the current assets and dividing them by the current liabilities; this will indicate a ratio for how many times the liabilities are covered by the current assets (Elliott & Elliott, 2013).
Table 3; Current Ratio
Current assets
150,500
Current liabilities
20,650
Current ratio
7.29
It is usually recommended that firms should have a current ratio of at least 1.5, to ensure that there are 1.5 times more current assets compared to liabilities, as this...
A ratio of 7.29 shows the firm is highly liquid and does not have any cash flow problems (Elliott & Elliott, 2013). However with such a high ratio, it may be argued that there is an opportunity cost associated with holding so many assets in such as liquid form, as they may create more value being used in other ways (Nellis & Parker, 2006).
Part B
The net working capital is the current assets less the current liabilities (Elliott & Elliott, 2013).
Table 4; Net Working Capital
Current assets
150,500
Current liabilities
20,650
Net working capital
129,850
This tells us that Globus has 129,850 more in current assets than is needed to pay their current liabilities. This calculation may also be useful when assessing the level of liquid assets on hand which are either cash, or may be converted into cash, in the near future to consider further purchase and investment strategies (Drury, 2015). Here it may be seen the firm has the potential to spend up to the surplus of assets over liabilities, given time for them to be realised.
Part C
The debt to equity ratio is the total liabilities divided by equity, and also referred to as the gearing, or leverage ratio (Investopedia, 2016; Elliott & Elliott, 2013).
Table 5; Debt to Equity Ratio
Debt
93,450
Equity
112,350
Debt/equity ratio
0.83
This shows that for every $1 of equity, there is $0.83 of debt, and can be used…
