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Chapter 15: Q12SE (page 838)

Traditional Mills’s balance sheet appears as follows (amounts in thousands):

Use the following ratio data to complete Traditional Mills’s balance sheet.

  1. Current ratio is 0.72.

2. Acid-test ratio is 0.36.

Short Answer

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Answer

Accounts Receivables = $855, Prepaid Expense= $100, Total Current Assets= $1800, Plant Assets, Net= $2710, Long-term Note Payable =$1290, Total Liabilities=$4550, Total Liabilities and Stockholders=$7000

Step by step solution

01

Preparation of Balance Sheet

TRADITIONAL MILLS

Balance Sheet

December 31, 2018

Assets
$
Liabilities
$
Cash
45
Total Current Liabilities
2,500
Accounts Receivables
855Long-term Note Payable
1,290
Merchandise Inventory
800Other Long-term Liabilities
760
Prepaid Expenses
100Total Liabilities
4,550
Total Current Assets
1,800

Plant Assets, Net
2,710Stockholders’ Equity

Other Assets
2,490
Stockholders’ Equity
2,450
Total Assets
7,000
Total Liabilities and Stockholders’ Equity
7,000
02

Step 2:Calculations

Total asset = Total liabilities and stockholder’s equity

Therefore, total liabilities and stockholder’s equity = $7,000

Total liabilities and stockholder’s equity = Total liabilities + Stockholder's equity

Total liabilities = $7,000 - $2450

= $4,550

Total liabilities = Total current liability + Long term note payable + Other long term liabilities

Long term notes payable =$4,550 - $2,500 - $760

= $1290

Current ratio = Current asset/ Current liabilities

Current assets = 0.72x2500

= $1,800

Total asset = Plant asset + Other asset + Total current asset

Plant asset = $7,000 - $1,800 - $2,490

=$2,710

Acid ratio = (Cash + Investment + Account receivable)/ Current liabilities

Account receivable = $2,500x0.36 - $45

Account receivable = $855

Prepaid expense = Total Current Assets – Inventory – Account Receivable - Cash

= $1800 - $800 - $855 - $45

= $100

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Most popular questions from this chapter

Preparing common-size income statements

Refer to the data presented for Mulberry Designs, Inc. in Exercise E15-13.

Requirements

1. Prepare a comparative common-size income statement for Mulberry Designs,

Inc. using the 2018 and 2017 data. Round percentages to one-tenth percent (three

decimal places).

2. To an investor, how does 2018 compare with 2017? Explain your reasoning.

Determining the effects of business transactions on selected ratios

Financial statement data of Modern Traveler’s Magazine include the following items:

Cash

\(19,000

Accounts Receivable, Net

82,000

Merchandise Inventory

183,000

Total Assets

638,000

Accounts Payable

102,000

Accrued Liabilities

35,000

Short-term Notes Payable

50,000

Long-term Liabilities

221,000

Net Income

69,000

Common Shares Outstanding

50,000 shares

Requirements

  1. Compute Modern Traveler’s current ratio, debt ratio, and earnings per share. Round all ratios to two decimal places, and use the following format for your answer:

Current ratio

Debt ratio

Earnings per share

2. Compute the three ratios after evaluating the effect of each transaction that follows. Consider each transaction separately.

a. Purchased merchandise inventory of \)42,000 on account.

b. Borrowed \(121,000 on a long-term note payable.

c. Issued 5,000 shares of common stock, receiving cash of \)103,000.

d. Received cash on account, $5,000.

Moss Exports is having a bad year. Net income is only \(60,000. Also, two important overseas customers are falling behind in their payments to Moss, and Moss’s accounts receivable are ballooning. The company desperately needs a loan. The Moss Exports Board of Directors is considering ways to put the best face on the company’s financial statements. Moss’s bank closely examines cash flow from operating activities. Daniel Peavey, Moss’s controller, suggests reclassifying the receivables from the slow-paying clients as long-term. He explains to the board that removing the \)80,000 increase in accounts receivable from current assets will increase net cash provided by operations. This approach may help Moss get the loan.

Requirements

1. Using only the amounts given, compute net cash provided by operations, both without and with the reclassification of the receivables. Which reporting makes Moss look better?

2. Under what condition would the reclassification of the receivables be ethical? Unethical?

The financial statements of Ion Corporation include the following items:

Current Year Preceding Year

Balance Sheet:

Cash \( 6,000 \) 8,000

Short-term Investments 4,400 10,700

Net Accounts Receivable 21,600 29,200

Merchandise Inventory 30,800 27,600

Prepaid Expenses 6,000 3,600

Total Current Assets 68,800 79,100

Total Current Liabilities 53,200 37,200

Income Statement:

Net Sales Revenue $ 184,800

Cost of Goods Sold 126,000

Compute the following ratios for the current year:

7. Current ratio

8. Acid-test ratio

9. Inventory turnover

10. Gross profit percentage

Briefly describe the ratios that can be used to evaluate a company’s stock as an investment.
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