Question

Indicate your criticisms of the balance sheet and brietly ment of any item criticized. following is the balance sheet of Rubber Industries: RUBBER INDUSTRIES Balance Sheet For the Year Ended December 31, 2012 Current assets: S 50 Cash 1 9,000 60,000 Marketable equity securities Accounts receivable, net Inventory Treasury stock 30,000 20,000 $179,000 Total current assets Land and buildings, net Short-term U.S. notes Supplies Plant assets: 160,000 Investments: 20,000 Other assets 4,000 Total assets Liabilities and Stockholders' Equity Liabilities: Bonds payable Accounts payable Wages payable $123,000 40,000 10,000 $173,000 Total liabilities Stockholders equity Common stock (S20 par, 20,000 shares authorized 120,000 50,000 20,000 $363,000 6,000 shares outstanding) Retained earnings Redeemable preferred stock Total liabilities and stockholders' equity

Answer 1

Ans; Evaluating a company's balance sheet is very critical and at the same time crucial for the external investors and creditors. Proper evaluation will lead to true and fair financial position of the company.

In this case, few components that can be used to criticize the balance sheet of Rubber Industries are as follows;

1) Working Capital of the company,which is calculated as = Current Assets - Current Liabilities

=$179,000 - $173,000 =$6000

This is an indicator whether the company will be able to pay its current obligations such as paying bills,make a loan payment etc. Higher the amount of working capital more will be the interests of the investors. But in this case the working capital is comparatively lower that the average mark.

2) Current Ratio of the company= Current assets / Current Liabilities

= 179,000 / 173,000 = 1.03 : 1

The ratio is lower than the standard ratio of 2:1 which reflects the company's incapability to meet its day to day proceedings.

3) Accounts Receivable-  This company has $60,000 as payments to be recovered from sales out of $179,000 current assets, which amounts to around 33.5% of the current assets. This shows that the company is unable to recover payments from its debtors and can possess high risk in the near future in the form of bad debts.

4) Wages Payable-  Showing this item in a yearly balance sheet also indicates that the company is unable to make payments to its own employees and labors due to shortage of liquid cash(as it is still needed to be paid), thus decreasing the morale of the workers leading to downfall in the efficiency of the employees.

5) Non Disclosure of Intangible Assets- These assets are in the form of patents,copy rights,goodwill etc. In the given case neither of the assets are shown in the balance sheet. Often, intangibles are buried in other assets and only disclosed in as a foot note in the finance report. Thus blinding the eyes of the external traders.