Solution For Verbrugge Publishing Company Balance Sheet

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Verbrugge Publishing Company’s financial statements include a detailed balance sheet and income statement. The balance sheet provides a snapshot of the company’s assets, liabilities, and equity at a specific point in time, while the income statement summarizes the company's earnings over a fiscal period. Analyzing these financial statements allows assessing the company's financial health, liquidity, and leverage, which are vital for decision-making by managers, investors, and creditors.

Analysis of Verbrugge Publishing Company’s Financial Position

The balance sheet of Verbrugge Publishing reveals total assets amounting to $327, with current assets of $159 and net fixed assets of $153. The company's current liabilities stand at $42, supplemented by advance payments of $78, totaling short-term obligations. Long-term liabilities include $90 in debentures and $6 in reserves. The equity section shows preferred stock valued at $45 and common stock at $9, with retained earnings of $57. This configuration results in a balanced accounting equation, satisfying the fundamental principle that Assets = Liabilities + Equity.

From a liquidity perspective, the current assets exceed current liabilities (Assets: $159 vs. Liabilities: $42), indicating adequate short-term liquidity. The company's readiness to fund immediate obligations is further supported by high levels of advance payments, which often signify pre-paid revenue or customer deposits, providing additional cash inflow stability.

Income Statement and Earnings Analysis

The income statement indicates net sales of $540, juxtaposed against total operating expenses of $516, producing a net operating income of $24. Additionally, non-operating income of $3 contributes to earnings before interest and taxes (EBIT). After accounting for $7.2 in interest expenses, the company’s earnings before tax reach $19.8. With a tax rate of 50%, the net income totals $9.9, with dividends on preferred stock amounting to $2.88. The remaining earnings of $7.02 are available to common stockholders, representing a return that supports shareholder value.

Financial Ratios and Reorganization Impact

In evaluating leverage, the debt ratio before reorganization is approximately 35.71%, calculated as the sum of short-term and long-term liabilities ($42 + $78) divided by total assets ($336). Following proposed reorganization, which would include additional debt, the debt ratio would increase to about 64.22% as total liabilities (including $90 in new debentures) rise to $210, divided by total assets of $327. This significant increase indicates heightened financial leverage and risk.

The decision against reorganization is based on the increased debt ratio, which could compromise the company's financial stability and flexibility. Elevated leverage raises concerns about insolvency risk, particularly if earnings decline or cash flow deteriorates, affecting the company's ability to meet debt obligations.

Conclusion

Overall, Verbrugge Publishing demonstrates a stable financial position with good liquidity and moderate leverage. The company's income performance indicates profitability sufficient to cover interest expenses and provide returns to shareholders. However, any consideration of increasing leverage, such as through reorganization, involves substantial risk increases, as reflected by the higher debt ratio. Sustainable growth should balance leveraging benefits with maintaining prudent risk levels, supporting ongoing operational stability and investor confidence.

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