Trial Balance Current Year Smith Manufacturing Inctrial Bala

Trial Balance Current Yearsmith Manufacturing Inctrial Balancedece

Below is the analysis and comparison of the trial balances for Smith Manufacturing, Inc. for the current year and the prior year. This includes an examination of the financial statements, highlighting key changes, notes, and the overall financial position of the company based on the trial balances provided.

Paper For Above instruction

Smith Manufacturing, Inc. has provided two trial balances reflecting its financial position at the end of two fiscal years. The current year trial balance, dated December 31, 20XX, indicates a comprehensive overview of the company's financial standing, while the prior year's trial balance offers a comparative base for analysis. This paper will analyze the differences, assess the company's financial health, and interpret key financial statements derived from these balances.

Introduction

Financial statements are crucial tools for stakeholders to assess a company's financial health and operational efficiency. The trial balance provides the foundational data from which financial statements such as the balance sheet, income statement, and statement of changes in equity are prepared. Comparing the trial balances of consecutive years allows analysts to identify trends, evaluate management decisions, and forecast future performance. This analysis aims to explore the significant variances between the current year and prior year trial balances of Smith Manufacturing, Inc., and interpret their implications.

Overview of the Current Year Trial Balance

The current year trial balance presents total debits of $2,123,123 and total credits of an equivalent amount, indicating the books are balanced. Major asset accounts include Cash at $362,750, Accounts Receivable at $320,750, inventory valued at $30,000, land at $50,000, building at $150,000, and equipment totaling $500,000. Accumulated depreciation for both buildings and equipment shows a total of $7,500 and $50,000, respectively, reflecting depreciation expenses accumulated over time.

Liabilities are comprised of Accounts Payable at $105,000, notes payable due in 10 months at 5% interest totaling $125,000, and long-term notes payable of $500,000 with a 3% interest rate due in five years. Equity accounts include common stock of $300,000 and retained earnings amounting to $171,000. Revenue from sales is reported as $850,000, with cost of goods sold at $550,000. Expenses include salaries ($150,000), insurance, depreciation, interest, and bad debt expenses, though specific amounts for some expenses are not provided, which indicates a need for further detailed financial statement analysis.

Overview of the Prior Year Trial Balance

The prior year's trial balance shows total debits of $1,025,025 and credits of $1,025,025, again indicating a balanced ledger. Assets at year-end include cash of $15,000, accounts receivable of $225,750, inventory of $80,000, land at $50,000, and the same building and equipment values as the current year. Accumulated depreciation remains consistent with the current year for the building and equipment.

Liabilities consist of accounts payable at $55,000, a short-term note payable of $50,000, salaries payable, and interest payable, which was higher at $17,250, and a long-term note payable of $350,000 with a 3% interest rate. Equity and revenue figures mirror those of the current year, with retained earnings recorded at $171,000 and no detailed information on expenses beyond totals. The notable increase in assets, particularly cash and accounts receivable, indicates growth or improved collections compared to the previous year.

Comparison and Analysis of Changes

One of the most prominent changes between the two years is the increase in current assets, especially cash and accounts receivable. Cash has grown from $15,000 in the prior year to $362,750 in the current year, suggesting improved liquidity or successful cash collection strategies. Accounts receivable has increased from $225,750 to $320,750, indicating higher sales or extended credit periods.

Inventory levels declined from $80,000 to $30,000, which could mean improved inventory turnover, sale of older stock, or tighter inventory management. Land and building values remained unchanged, reflecting stable fixed asset values, although accumulated depreciation figures reveal ongoing depreciation expenses.

Liabilities show a substantial increase in short-term notes payable from $50,000 to $125,000, indicating increased short-term borrowing which may be used for expansion or operational needs. Long-term liabilities also increased from $350,000 to $500,000, reflecting possible financing of new investments or refinancing strategies.

Equity remained constant at $300,000 for common stock, and retained earnings stay at $171,000, which may need adjustment based on net income calculations from the income statement, not provided here. The significant increase in total assets and liabilities suggests the company is undergoing growth or expansion, although it also raises questions about liquidity and debt management strategies.

Financial Ratios and Interpretations

Liquidity ratios such as the current ratio have likely improved given the increase in current assets and short-term liabilities. The current ratio for the current year can be calculated as follows:

Current Ratio = Total Current Assets / Total Current Liabilities

Assuming that accounts payable and accrued liabilities constitute the primary current liabilities, the current ratio for the current year is approximately:

Current Ratio = ($362,750 + $320,750 + $10,000) / ($105,000 + $125,000) ≈ ($693,500) / ($230,000) ≈ 3.02

This indicates good liquidity, as the company's current assets can cover current liabilities over three times.

Similarly, the debt-to-equity ratio for the current year is calculated as:

Debt-to-Equity = Total Liabilities / Shareholders’ Equity

Total liabilities include both current and long-term liabilities, summing to approximately $230,000 (short-term) + $500,000 (long-term) = $730,000. Shareholders’ equity equals $471,000 ($300,000 common stock + $171,000 retained earnings). Therefore:

Debt-to-Equity ≈ $730,000 / $471,000 ≈ 1.55

This suggests the company is financed with more debt than equity, typical of expanding manufacturing firms, but warrants careful monitoring of debt levels relative to earnings and cash flows.

Conclusion

The comparison of the trial balances reveals positive growth indicators for Smith Manufacturing, notably increased assets and liabilities, which may signify expansion efforts. However, the increased reliance on debt raises concerns regarding debt management and future interest obligations. The company's liquidity appears healthy based on the current ratios but requires ongoing monitoring, especially given the significant increase in short-term liabilities. Further analysis with detailed income statements and cash flow statements would provide a complete view of the firm's financial health, profitability, and operational efficiency. Overall, Smith Manufacturing's financial position appears robust with strategies possibly geared toward growth, although careful management of debt and liquidity is essential to sustain long-term success.

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