Company Has 120,000 In Current Assets And 550,000 In Total A
A Company Has 120000 In Current Assets 550000 In Total Assets
1. A company has $120,000 in current assets; $550,000 in total assets; $90,000 in current liabilities, and $110,000 in total liabilities. Calculate the current ratio of the company. (Round your answer to two decimal places.) 1.33 1.72 1.75
2. The net income of Hendley Company for the year is $25,000. Withdrawals during the year were $30,000. No new capital contributions were made during the year. Which of the following statements is TRUE? Hendley, Capital account decreases by $25,000. Hendley, Capital account decreases by $5,000. Hendley, Capital account increases by $30,000. Hendley, Capital will remain the same.
3. Martinville Company earned revenues of $20,000 and incurred expenses of $4,000. Martinville withdrew $3,500 for personal use. What is the balance in the Income Summary account prior to closing net income or loss to the Martinville, Capital account? Debit balance of $16,000. Debit balance of $12,500. Credit balance of $16,000. Credit balance of $20,000.
Paper For Above instruction
The assignment addresses fundamental financial accounting principles and calculations involving liquidity ratios, capital account adjustments, and income summary balances. These elements are essential for understanding a company's financial health, owner equity changes, and the preliminary stage of closing entries. This paper aims to analyze each of the three scenarios thoroughly and provide the necessary calculations, interpretations, and implications based on standard accounting frameworks.
Calculating the Current Ratio
The first task involves calculating the current ratio for a company based on provided assets and liabilities. The current ratio is a key liquidity ratio that measures a company's ability to meet its short-term obligations using its short-term assets. It is calculated as:
Current Ratio = Current Assets / Current Liabilities
Given that the current assets amount to $120,000 and current liabilities to $90,000, plugging in the values yields:
Current Ratio = $120,000 / $90,000 = 1.33
Thus, the company's current ratio is approximately 1.33, indicating it has $1.33 in current assets for every dollar of current liabilities. This ratio suggests satisfactory short-term liquidity, although different industries might have varying acceptable ratios.
Owner’s Capital Changes Based on Net Income and Withdrawals
The second scenario examines the impact of net income and withdrawals on Hendley Company's capital account. Net income increases the owner’s capital, while withdrawals decrease it. Since no new capital contributions occurred during the year, the change in the capital account is driven solely by net income and withdrawals.
Net income = $25,000, withdrawals = $30,000
Change in capital = Net income - Withdrawals = $25,000 - $30,000 = -$5,000
This indicates a net decrease in the capital account of $5,000. Therefore, Hendley's capital account decreases by $5,000 during the year, making the correct statement: "Hendley, Capital account decreases by $5,000."
Income Summary Balance Before Closing
The third case involves determining the balance in the Income Summary account before it is closed to owner’s equity. Income Summary temporarily holds revenues and expenses during the closing process.
Revenues = $20,000
Expenses = $4,000
Net income = Revenues - Expenses = $20,000 - $4,000 = $16,000
Before closing net income to the owner's capital, the Income Summary account will have a credit balance of $16,000, representing the net income earned during the period before it is transferred.
Conclusion
Understanding these fundamental calculations allows stakeholders to assess liquidity, ownership equity changes, and profitability measures pivotal to sound financial management and reporting. Accurate computation of ratios and balances supports strategic decisions and ensures compliance with accounting standards.
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