Question

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Balance Sheet Project Description: A balance sheet is a section of an annual tinancial report that presents the Company's osscts and liabilities. It provides the users of this statement key measures of the Company's liquidity and its ability to meet its current and future obligations as well as summarizes how the assets and liabilities are presented. Ta complete this section, answer the following required question using information taken from the balance sheet for year 2018 and 2017: 1. The accountine equation is Assets = Liabilities + Stockholders' Equity. Replacing the words in the accounting coustion with dollar amounts, give the company's occounting equation at the end of the current and prior years. 1. 2018 11.2017 2 Calculate the company's current ratio (pg. 221 in textbook] for both 2018 and 2017. 3. What does this ratio and number mean? 5. Has the current ratio improved or declined? Explain. 3. Qlculate the company's debt ratio lpg 223 in textbook) for both 2018 and 2017 a. What does this ratio and number mean? 5. Has the debt ratia improved ar declined ? Explain. Balance Sheet Analysis.

Answer 1

		2017 ($)	2018 ($)
	Total Assets	800,000	920,000
	Total Liabilities = Total current liabilities + long-term debt
	Total current liabilities	75,000	100,000
	Total long-term debt	150,000	200,000
	Total Liabilities	225,000	300,000
	Stockholders Equity = Total owners equity	575,000	620,000
	Accounting equation
	Assets = Total liabilities + Stockholders Equity
	Assets	Total Liabilities	Stockholders Equity
2018	$920,000	$300,000	$620,000
2017	$800,000	$225000	$575,000

Current ratio	Current assets / Current liabilities
	2017 ($)	2018 ($)
Total current assets	300,000	350,000
Total current liabilities	75,000	100,000
Current ratio	300,000 / 75,000	350000 / 100,000
	4.0	3.5

Current ratio measures the liquidity of the company. Higher ratio is an indication that the company will be able to pay its current liabilities. A ratio of less than 1 means that the company is facing a liquidity crisis.

From the above , the current ratio has declined to 3.5 in 2018 from 4.0 in 2017. The primary reason being increase in current liabilities to $100,000 in 2018 from $75,000 in 2017. Current liabilities in 2018 i.e., accounts payable and short-term debt had increased by $5,000 and $20,000 respectively.

Debt ratio	Total liabilities / Total assets
	2017 ($)	2018 ($)
Total current liabilities	75,000	100,000
Long-term debt	150,000	200,000
Total liabilities	225,000	300,000
Total current assets	300,000	350,000
Total net fixed assets	500,000	570,000
Total assets	800,000	920,000
Debt ratio	225,000 / 800,000	300,000 / 920,000
	0.28	0.33

Debt ratio is calculated as total liabilities / total assets. It indicates the percentage of assets owed to creditors. In simple words, whether the company has enough assets to pay off its liabilities. Higher the ratio its a good indicator.

From the above calculation, the debt ratio has improved to 0.33 in 2018 from 0.28 in 2017. The reason being significant improvement in total assets which increased by $120,000 in 2018.

Balance sheet Analysis

	2017 ($)	2018 ($)
Total current assets	300,000	350,000
Total non current assets	500,000	570,000
Total assets	800,000	920,000
% split
Current assets (total current assets / total assets) * 100	37.50%	38.04%
Non current assets (total non current assets / total assets) * 100	62.50%	61.96%

	2017 ($)	2018 ($)
Current debt	75,000	100,000
Long-term debt	150,000	200,000
Total debt	225,000	300,000
% split
Current debt ( current debt / total debt ) * 100	33.33%	33.33%
Long-term debt (long-term debt / total debt) * 100	66.67%	66.67%

4 C. Major significant change has occurred in all components in the debt. Apart from that, there was also significant change in inventory.

4 D. Current liabilities has increased by $25,000 i.e., around 33.33% as both account payable and short-term debt had increased.