Question

For this question, please refer to the Big Brake's Trial Balance with ending totals for December 31, 2018 in the table below:

Account	Balance ($)
Checking	15,220
Savings	58,500
Money Market	41,650
Pre-Paid Rent	5,400
Accounts Receivable	81,000
Accounts Receivable Allowances	-6,500
Machinery	122,600
Equipment	80,300
Automobiles	67,500
Accounts Payable	60,000
Loans Payable	21,300
Equity	384,370

1. Using a Spreadsheet, create the Balance Sheet for Big Brakes.
2. Using the information obtained from your Balance Sheet, calculate any one (1) liquidity and any one (1) leverage ratio.
3. Comment on the financial position of the organization, specific to the two ratios you calculated. What is the main reason that Big Brakes (and other organizations) need a Balance Sheet? (100-200 words)

Answer 1

3.financial position of organisation:

In the context of current ratio:

This ratio measures the financial strength of the organisation . Generally 2:1 is treated as the ideal ratio, but it depends on industry to industry. Short-term solvency refers to the ability of a business to pay its short-term obligations when they become due. Short term obligations (also known as current liabilities) are the liabilities payable within a short period of time, usually one year.A higher current ratio indicates strong solvency position and is therefore considered better.It requires a deep analysis of the nature of individual current assets and current liabilities. A a organisation  with high current ratio may not always be able to pay its current liabilities as they become due if a large portion of its current assets consists of slow moving or obsolete inventories. On the other hand, a company with low current ratio may be able to pay its current obligations as they become due if a large portion of its current assets consists of highly liquid assets i.e., cash, bank balance, marketable securities and fast moving inventories.

The current ratio is 3.363which means the company’s currents assets are 3.363 times more than its current liabilities.

In the context of equity ratio:

Debt ratio is a solvency ratio that measures a firm’s total liabilities as a percentage of its total assets. In a sense, the debt ratio shows a company’s ability to pay off its liabilities with its assets. In other words, this shows how many assets the company must sell in order to pay off all of its liabilities.

This ratio measures the financial leverage of a company. Companies with higher levels of liabilities compared with assets are considered highly leveraged and more risky for lenders.

Big bakes only has a debt ratio of 0.17. This is a relatively low ratio and implies that Big bakes will be able to pay back his loan. Big bakes shouldn’t have a problem getting approved for his loan.

The main reason that Big Brakes (and other organizations) need a Balance Sheet:

A balance sheet is one of several major financial statements you can use to track spending and earnings. Also called a statement of financial position, a balance sheet shows what your company owns and what it owes through the date listed, as Accounting Coach stated. It displays this information in terms of your company's assets, liabilities, and equity.

Assets are any items your business owns. Liabilities are payments your business needs to make. Equity is the amount your business's shareholders own. On balance sheets, the assets are ideally equal to, or balance out, the liabilities and the equity.

It's clear that balance sheets are critical documents because they keep business owners like you informed about your company's financial standing. As Inc. magazine pointed out, many business owners fail to recognize their companies are in trouble until it's too late. This is because some business owners aren't examining their balance sheets. Typically, if the ratio of your business's assets to liabilities is less than 1 to 1, your company is in danger of going bankrupt, and you'll have to make some strategic moves to improve its financial health.

Balance sheets are also important because these documents let banks know if your business qualifies for additional loans or credit. Balance sheets help current and potential investors better understand where their funding will go and what they can expect to receive in the future. Investors appreciate businesses with high cash assets, as this insinuates a company will grow and prosper.