Question

Answer the question below. It is important that you show your work. Either type the formula used or your inputs (PN, N, etc.) 6. Your neighbor would like some help getting his finances in order. He has asked that you review the following list of his assets and liabilities: 25 points Savings Account: $1,000 6-month Certificate of Deposit: $200 Car: $3,500 Baseball Card Collection: $75 Clothes: $450 Furniture: $600 Credit Card Bills: $375 Money Owed to Friend: $100 Car Loan: $1,000 What is your neighbor's net worth?|| Which asset is considered a monetary asset on the balance sheet? What is the total amount owed for current debts/liabilities? What is his current ratio? • What is his debt ratio? Interpret the current and debt ratio calculations.

Answer 1

Balance sheet and ratio analysis:

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1. Neighbour's Net worth:

To determine the neighbour's net worth, balance sheet needs to be prepared as given bellow where the value of equity is determined by subtracting liabilities from total assets.

Amount $ $ $ 1,000 200 1,200 Balance sheet Assets: Current Assets Savings Account 6-Month Certificate of Deposit Total Current Assets Non-Current Assets Clothes Furniture Baseball Card Collection Car Total Non-Current Assets Total Assets 450 600 75 $ $ $ $ $ $ 3,500 4,625 5,825 Liabilities Current Liaibilites Credit card bills Money owed to freind Total Current Liabilites 375 $ $ $ 100 475 Non-current Liabilities Car Loan Total Non-current Liabilities $ $ 1,000 1,000 Equity Owner's Equity $ 4,350 Total Liabilities $ 5,825

Hence, Neighbour's net worth is $4,350.

2. Monetary asset:

Monetary assets are assets that carry fixed value in terms of currency and it's value remains static. In this case Saving accounts is monetary asset. If a 6-Month Certificate of Deposit is also readily convertible in cash then it can also be termed as a monetary asset.

3. Current Debt/Liabilities:

Current liabilities are debts that need to be paid in a period of next 12 months. In this case, total current liability can be traced in balance sheet which is $475, which includes Credit card bills which are usually to be paid monthly and money owed to friends which is assumed to be short term obligation as well.

4. Current ratio:

The current ratio denotes liquidity by depicting relation between current assets and current liability of business for every dollar owed in current liability is covered by what amount of current assets. It can be calculated by dividing Current assets with current liabilities.

His current ratio is 2.52. ($1200 / $475)

5. Debt ratio:

The debt ratio denotes level of debt against total asset by comparing total debt of entity with total assets. This can also be termed as portion of assets which is financed by long term debt. It can be calculated by dividend total debt with total assets.

His debt ratio is 0.17. ($1000 / $5825)

6. Interpretation of ratios:

Current ratio of neighbor is 2.52 which denotes that for each dollar to be paid in the next 12 month for payment of the liability, he has coverage of $2.52 available. This reflects very liquid financial position.

Debt ratio of 0.17 denotes that for asset of each dollar, funding is received from lenders for 17 cents. Neighbour can exercise higher leverage as he is not having much burden of debt.