Question

Consider the following company balance sheet and income statement.Balance Sheet:Assets Liabilities and EquityCash $4,000 Accounts payable $30,000Accounts receivable 52,000 Notes payable 12,000Inventory 40,000 Total current liabilities 42,000Total current assets 96,000 Long-term debt 36,000Fixed assets 44,000 Equity 62,000Total assets $140,000 Total liabilities and equity $140,000 Income StatementSales (all on credit) $200,000Cost of goods sold 130,000Gross margin 70,000Selling and administrative expenses 20,000Depreciation 8,000EBIT 42,000Interest expense 4,800Earning before tax 37,200Taxes 11,160Net income $26,040 For this company, calculate the following: Current Ratio Cash flow to Debt services ratio Debt to Assets ratio What additional information would you need to determine whether or not to make a loan to this company

Answer 1

Answer:

Current Ratio = Current assets/Current liabilities

= 96,000/42,000

= 2.29

Cash flow to Debt services ratio = Ending Cash/Interest Expense

= $4,000/$4,800 = 0.833

Debt to Assets ratio = Total liabilities/Total assets

=$58,000/$140,000

= 0.41

The previous year's financial statements would enable one to properly calculate the cash flow to debt service ratio.  The figures used in this situation were approximations of the correct figures.

Explanation:

a) Data and Calculations:

Balance Sheet:

Assets                                            Liabilities and Equity

Cash                            $4,000      Accounts payable         $30,000

Accounts receivable  52,000       Notes payable                 12,000

Inventory                    40,000       Total current liabilities    42,000

Total current assets  96,000        Long-term debt              36,000

Fixed assets              44,000         Equity                             62,000

Total assets           $140,000 Total liabilities and equity $140,000

Income Statement

Sales (all on credit)                         $200,000

Cost of goods sold                            130,000

Gross margin                                       70,000

Selling and administrative expenses 20,000

Depreciation                                          8,000

EBIT                                                      42,000

Interest expense                                   4,800

Earning before tax                              37,200

Taxes                                                     11,160

Net income                                      $26,040

Current Ratio = Current assets/Current liabilities

= 96,000/42,000

= 2.29

Cash flow to Debt services ratio = Ending Cash/Interest Expense

= $4,000/$4,800 = 0.833

Debt to Assets ratio = Total liabilities/Total assets

=$58,000/$140,000

= 0.41