# Question & Answer: Preparing Balance Sheets, Computing Income, and Applying the Current and Quick Ratios Balance sheet info…..

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.

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.