Uses and Limitations of the Balance Sh ...
The balance sheet can provide very useful information to users of financial statements.... Read More
Ratio analysis can assist with the conduct of time-series and cross-sectional analysis of a company’s financial position.
Balance sheet ratios are those ratios that involve balance sheet items only and include (i) liquidity ratios, which measure a company’s ability to meet short-term obligations; and (ii) solvency ratios, which measure financial risk, financial leverage, and a company’s ability to satisfy its long-term and other obligations.
$$ \begin{array}{c|c|c} \textbf{Ratio Name} & \textbf{Calculation} & \textbf{Indication} \\ \hline \text{Current Ratio} & {\cfrac {\text{Current assets}}{\text{Current liabilities}}} & \text{A company’s ability to meet} \\ {} & {} & \text{its short term obligations} \\ \hline \text{Quick Ratio (Acid test)} & {\text{Cash + Marketable securities}} & \text{Satisfies the same purpose as} \\ {} & {\cfrac {\text{+Receivables} }{\text{Current liabilities}} } & \text{the current ratio, but it’s} \\ {} & {} & \text{considered a tougher measure} \\ {} & {} & \text{as inventory is excluded } \\ \hline \text{Cash Ratio} & {\cfrac {\text{Cash + Marketable securities}}{\text{Current liabilities}}} & \text{Tests a company’s ability to} \\ {} & {} & \text{meet its short term} \\ {} & {} & \text{obligations using extremely} \\ {} & {} & \text{liquid assets} \\ \end{array} $$
$$ \begin{array}{c|c|c} \textbf{Ratio Name} & \textbf{Calculation} & \textbf{Indication} \\ \hline \text{Long term debt-to-equity} & { \cfrac {\text {Total long term debt}}{\text{Total equity}}} & \text{Financial leverage and financial risk} \\ \hline \text{Debt-to-equity} & {\cfrac {\text{Total debt}}{\text{Total equity}}} & \text{Financial leverage and financial risk} \\ \hline \text{Total debt} & {\cfrac {\text{Total debt}}{\text{Total assets}}} & \text{Financial leverage and financial risk} \\ \hline \text{Financial leverage} & {\cfrac {\text{Total assets}}{\text{Total equity}}} & \text{Financial leverage and financial risk} \\ \end{array} $$
Question 1
The following balance sheet information is given for company XYZ.
$$ \textbf{Company XYZ Balance Sheet} $$
$$ \begin{array}{l|r} \textbf{Assets} & \bf {\text{Dec }31,2016 ($)} \\ \hline \text{Current Assets} & {} \\ \hline {\quad \quad \text{Cash and cash equivalents}} & {100,000} \\ \hline {\quad \quad \text{Short-term marketable securities}} & {1,234,678} \\ \hline {\quad \quad \text{Accounts receivable}} & {52,000} \\ \hline {\quad \quad \text{Inventory}} & {1,170,356} \\ \hline \text{Total current assets} & {2,557,034} \\ \hline \text{Property, plant, and equipment (PPE)} & {6,834,190} \\ \hline \text{Intangible assets} & {3,370,041} \\ \hline \textbf{Total assets} & \bf{12,761,265} \\ \hline \textbf{Liabilities and shareholders’ equity} & {} \\ \hline \text{Current Liabilities} & {} \\ \hline {\quad \quad \text{Accounts payable}} & {3,825,396} \\ \hline \text{Total current liabilities} & {3,825,396} \\ \hline \text{Bonds payable} & {3,771,894} \\ \hline \text{Total liabilities} & {7,597,290} \\ \hline \text{Total shareholders’ equity} & {5,163,975} \\ \hline \textbf{Total liabilities and shareholders’ equity} & \bf {12,761,265} \\ \end{array} $$
The current ratio for company XYZ is closest to:
- 0.34.
- 0.67.
- 1.20.
Solution
The correct answer is B.
$$\text{Current ratio} = \frac{\text{Current assets}}{\text{Current liabilities}} = \frac{2,557,034}{3,825,396} = 0. buy modafinil in the us https://yanginstitute.com/ 67$$
Question 2
Kylee Co. reported the following information on its latest balance sheet.
$$ \textbf{Kylee Co. Balance Sheet} $$
$$ \begin{array}{l|r|l|r} \textbf{Assets} & \text{} & \textbf{Liabilities & equity} & \text{} \\ \hline \text{Cash} & {50} & \text{Accounts payable} & {30} \\ \hline \text{Accounts receivables} & {80} & \text{Long-term liabilities} & {150} \\ \hline \text{Property, plant and} & {270} & \text{Shareholder’s equity} & {220} \\ \text{equipment (PPE)} & {} & {} & {} \\ \hline \textbf{Total assets} & {400} & \textbf{Total liabilities &} & {400} \\ {} & {} & \textbf{equity} & {} \\ \end{array} $$
According to the information provided, the current ratio of Kylee Co. is closest to:
- 3.67.
- 4.33.
- 4.72.
Solution
The correct answer is B.
$$\text{Current ratio} = \frac{\text{Current assets}}{\text{Current liabilities}}$$
The only current assets reported on the balance sheets are cash and accounts receivables. The only current liability reported above is accounts payable.
$$\text{Current ratio} = \frac{\text{(Cash + Accounts receivable)}}{\text{Accounts payable}} =\frac{(50 + 80)}{30 }= 4.33$$