Read The Instructions, The Problem, And Complete All The Que
Instructionsread The Problemn And Complete All The Questions Included
Instructions: Read the problemn and complete all the questions included below. Submit your answers on a Word (.doc) or Excel (.xls) document. Handwritten submittals will not be accepted. Check the Rubric. As a consultant for Acme Engineering you have been able to establish the following parameters from their Financial Statements: Item Amount Cash $200,000 Securities $90,000 Accounts Receivable $300,000 Inventories $400,000 Prepaid Expenses $16,000 Accounts Payable $630,000 Other Liabilities $180,000. Calculate the following parameters: Total Assets, Total Liabilities, Working Capital, Current Ratio, Acid Test Ratio.
Paper For Above instruction
In this analysis, I will determine the key financial ratios and figures for Acme Engineering based on the provided financial statement data. Understanding these parameters is fundamental for assessing the company's financial health, liquidity, and operational efficiency. The calculations involve deriving total assets, total liabilities, working capital, current ratio, and acid test ratio, all of which are critical indicators used by financial analysts and stakeholders.
Introduction
Financial ratios and measurements act as vital tools for evaluating a company’s performance. They offer insights into liquidity, solvency, efficiency, and profitability. For Acme Engineering, an understanding of these metrics provides an overview of its current financial position and operational viability. The provided data includes current assets such as cash, securities, accounts receivable, inventories, and prepaid expenses, as well as current liabilities in the form of accounts payable and other liabilities. In this report, I will compute each required parameter methodically.
Calculation of Total Assets
Total assets encompass all current assets listed in the financial statements. These include cash, securities, accounts receivable, inventories, and prepaid expenses. Mathematically, this is expressed as:
Total Assets = Cash + Securities + Accounts Receivable + Inventories + Prepaid Expenses
Substituting the given values:
Total Assets = $200,000 + $90,000 + $300,000 + $400,000 + $16,000 = $1,006,000
Hence, the total assets of Acme Engineering amount to $1,006,000.
Calculation of Total Liabilities
Total liabilities are the sum of all current liabilities, primarily accounts payable and other liabilities as provided:
Total Liabilities = Accounts Payable + Other Liabilities
Total Liabilities = $630,000 + $180,000 = $810,000
This indicates that Acme Engineering has total liabilities of $810,000, which reflects its obligations that need to be settled.
Calculation of Working Capital
Working capital measures the company's short-term liquidity and operational efficiency. It is calculated as:
Working Capital = Current Assets - Current Liabilities
Current Assets: Sum of all current assets listed:
- Cash: $200,000
- Securities: $90,000
- Accounts Receivable: $300,000
- Inventories: $400,000
- Prepaid Expenses: $16,000
Total current assets = $200,000 + $90,000 + $300,000 + $400,000 + $16,000 = $1,006,000
Current liabilities:
- Accounts Payable: $630,000
- Other Liabilities: $180,000
Total current liabilities = $630,000 + $180,000 = $810,000
Working Capital = $1,006,000 - $810,000 = $196,000
The positive working capital of $196,000 suggests that Acme Engineering has sufficient short-term assets to meet its short-term liabilities.
Calculation of Current Ratio
The current ratio evaluates the company's ability to pay short-term obligations with its short-term assets. It is given by:
Current Ratio = Current Assets / Current Liabilities
Using the calculated figures:
Current Ratio = $1,006,000 / $810,000 ≈ 1.24
A current ratio of approximately 1.24 indicates that Acme Engineering has enough current assets to cover its current liabilities, aligning with acceptable liquidity standards.
Calculation of Acid Test Ratio
The acid test ratio, or quick ratio, measures immediate liquidity by excluding inventories and prepaid expenses which may not be quickly convertible to cash. It is calculated as:
Acid Test Ratio = (Cash + Securities + Accounts Receivable) / Current Liabilities
Numerator:
Cash + Securities + Accounts Receivable = $200,000 + $90,000 + $300,000 = $590,000
Denominator:
Current Liabilities = $810,000
Acid Test Ratio = $590,000 / $810,000 ≈ 0.73
Since the acid test ratio is less than 1, it suggests that Acme Engineering may face liquidity challenges in immediate obligation settlements without converting inventories or prepaid expenses to cash.
Conclusion
Based on the calculations, Acme Engineering exhibits a healthy total asset base and adequate working capital, indicating solid short-term operational capability. The current ratio exceeds 1, signifying sufficient liquidity to cover short-term liabilities, although the quick ratio indicates potential liquidity constraints if inventories cannot be liquidated swiftly. Financial managers should monitor these ratios regularly to ensure liquidity remains robust against operational and market demands. Overall, these metrics are vital for internal decision-making and for providing stakeholders with a comprehensive financial overview.
References
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