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letter b please
Preparing Balance Sheets, Computing Income, and Applying the Current and Quick Ratios Balance sheet information for Lang Services at the end of 2014 and 2015 is: a. Prepare its balance sheet for December 31 of each year. b. Lang Services raised $5,000 cash through issuing additional common stock early in 2015, and it declared and paid a $17,000 cash dividend in December 2015. Compute its net income or loss for 2015. c. Calculate the current ratio and quick ratio for 2015. d. Assume the industry average is 1.5 for the current ratio and 1.0 for the quick ratio. Comment on Lang’s current and quick ratios relative to the industry. Constructing Balance Sheets and Determining Income Following is balance sheet information for Lynch Services at the end of 2014 and 2015.
Expert Answer
Solution:
a) Balance Sheet for Dec 31 each year
| Lang Services | ||
| Balance Sheet As at | ||
| December’31, 2015 | December’31, 2014 | |
| Assets: | ||
| Current Assets | ||
| Cash | $10,000 | $8,000 |
| Accounts receivables | $22,800 | $17,500 |
| Supplies | $4,700 | $4,200 |
| Total Current Assets | $37,500 | $29,700 |
| Fixed Assets | ||
| Equipment | $32,000 | $27,000 |
| Total Assets | $69,500 | $56,700 |
| Liabilities and Stockholder’s Equity | ||
| Current Liabilities | ||
| Accounts Payable | $25,000 | $25,000 |
| Notes Payable | $1,800 | $1,600 |
| Total Current Liabilities | $26,800 | $26,600 |
| Stockholders’ Equity | $42,700 | $30,100 |
| Total Liabilities and stockholders’ equity | $69,500 | $56,700 |
Note — Total Assets = Total Liabilities and stockholders’ equity
Hence , Total Liabilities and stockholders’ equity = Total Current Liabilities + Stockholders’ Equity
For year 2015
Total Liabilities and stockholders’ equity = 26,800 + Stockholders’ Equity
Stockholders’ Equity (2015) = 69,500 – 26,800 = $42,700
For year 2014
Stockholders’ Equity (2014) = 56,700 – 26,600 = $30,100
b) We need to prepare only Stockholders Equity Section here to find out the Net Income or Loss for 2015
Stockholders Equity section is divided into Common Stock and Retained Earnings.
Common Stock represents the stock issued and paid up.
Retained Earnings represents the Accumulated Income of the company of past years and adjustment of Net Income and dividend or any transfer to the reserve for Current Year.
Calculation of Net Income for 2015
| Stockholders Equity for 2015 | $42,700 |
| Stockholders Equity for 2014 | $30,100 |
| Retained Earnings for Year 2015 (42,700 – 30,100) | $12,600 |
| Add: Dividend Paid in Dec 15 | $17,000 |
| Net Income for year 2015 (12,600 + 17,000) | $29,600 |
c)
Current Ratio for 2015 = Total Current Assets / Total Current Liabilities
= 37,500 / 26,800
= 1.399 or 1.4
Quick Ratio for 2015 = (Total Current Assets – Inventory – prepaid expenses) / Total Current Liabilities
= (37,500 – 0 – 0) / 26,800
= 1.399 or 1.40
d) Comment on Lang’s Current and quick ratio
Current Ratio is the best financial performance measure of an entity. It describes the ability of company to pay the short terms obligation.
The industries average Current Ratio is 1.5 and company’s current ratio is 1.4, it means company’s current ratio is not good as per the industries standard.
Quick Ratio also known as acid test ratio. Quick Ratio is higher than the Industries Average. It is good and the company is more liquid.
