Question

E2-46. Constructing Balance Sheets and Intrepreting Liquidity Measures

The following balance sheet data are reported for Bettis Contractors at June 30, 2015.

Accounts payable. . . . . . . . . . . . . . . . . $ 8,900                                    Common stock. . . . . . . . . . . . . . . . . . . $100,000

Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,700                                       Retained earnings . . . . . . . . . . . . . . . . ?

Supplies . . . . . . . . . . . . . . . . . . . . . . . . 30,500                                        Notes payable . . . . . . . . . . . . . . . . . . . 30,000

Equipment . . . . . . . . . . . . . . . . . . . . . . 98,000                                        Accounts receivable. . . . . . . . . . . . . . . 9,200

Land . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,000

Assume that during the next two days only the following three transactions occurred:

July 1 Paid $5,000 cash toward the notes payable owed.

2 Purchased equipment for $10,000, paying $2,000 cash and an $8,000 note payable for the remaining balance.

2 Declared and paid a $5,500 cash dividend.

a. Prepare a balance sheet at June 30, 2015.

b. Prepare a balance sheet at July 2, 2015.

c. Calculate its current and quick ratios at June 30, 2015. (Notes Payable is a noncurrent liability.)

d. Assume the industry average is 3.0 for the current ratio and 2.0 for the quick ratio. Comment on Bettis’s current and quick ratios relative to the industry.

Answer 1

Solution:

PART:A)

BALANCE SHEET	Jun-30
Assets
Cash	14,700
Accounts receivable	9,200
Supplies	30,500
Current assets	54,400
Land	25,000
Equioment	98,000
Total assets	177,400
Liabilities
Accounts payable	8,900
Current liabilities	8,900
Notes payable	30,000
Total liabilities	38,900
Stockholders’ equity
Common stock	100,000
Retained earnings	38,500
Total stockholders' equity	138,500
Total liabilities and stockholders’ equity	177,400

　

PART-B)

BALANCE SHEET	Jul-02
Assets
Cash	2,200
Accounts receivable	9,200
Supplies	30,500
Current assets	41,900
Land	25,000
Equioment	108,000
Total assets	174,900
Liabilities
Accounts payable	8,900
Current liabilities	8,900
Notes payable	33,000
Total liabilities	41,900
Stockholders’ equity
Common stock	100,000
Retained earnings	33,000
Total stockholders' equity	133,000
Total liabilities and stockholders’ equity	174,900

PART-C)

Current Ratio = $54,400/$8,900 = 6.1

Quick Ratio = ($14,700 + $9,200) / $8,900 = 2.69

PART-D)

The current ratio of Betti displays a strong liquidity position. The firm may take into considertion on investing some of its cash in assets that contribute to the earning power of the firm. The quick ratio is reasonable as the firm does not want to tie up too much of its assets in a nonearning asset (cash). A quick glance at the data shows that liquidity position of the firm has weakened since June