Understanding Financial Management - Assignment Example

At the time of purchase, Mr. Jones’s accountant told him that the standard useful life for this type of equipment was 10 years. Mr. Jones decided to use the straight-line method to calculate depreciation.

1. What amount would go on the Balance Sheet at the time of purchase?

$ 10,000 – The cost of a new asset

2. Where would this amount have been posted on the Balance Sheet?

 This amount should be posted under the Assets category, Machinery and Equipment subcategory

3. What is the current book value of the equipment?

Book value = Cost – accumulated depreciation

= 10,000- (1000*3) = $ 7,000

4. How much accumulated depreciation is posted?

Accumulated depreciation = $ 3,000
Consider this Income Statement situation:
Mr. Jones started the year with no olives in inventory. He bought 5,000 green olives at 25 cents each in March, 10,000 at 50 cents each in July, and 10,000 at 75 cents each in November. At year-end, he had 2,000 olives left in inventory.
Calculate his ending inventory value using:
5. Average cost method
FIFO

Number

$/Unit

Value($)

March

5,000

25 cents

1,250

July

10,000

50 cents

5,000

November

10,000

75 cents

7,500

2,000 Closing Stock

75 cents

1,500

The ending inventory = $ 1,500

LIFO

Number

$/Unit

Value($)

March

5,000

25 cents

1,250

July

10,000

50 cents

5,000

November

10,000

75 cents

7,500

2,000 Closing Stock

25 cents

500

The ending inventory = $ 500

Accounting Assignment—Part B
Financial Statement Analysis
Please solve the following Financial Statement Ratios using the Balance Sheet and Income Statement found below. Also tell me, in a sentence or two, what we have learned from each one. Don’t give me a definition of the ratio - tell me what these numbers tell us.
1. Current Ratio
CR = Current Assets/ Current Liabilities

Current Assets

2,550

Current Liabilities

1,100

Current Ratio

2.3

A current ratio of 2.3 is a healthy liquidity level since it means that the company is able to meet its short-term dues using its current assets/liquid assets. For that reason, the company cannot fall bankrupt easily (Baker, Benrud, and Powell 112). 
2. Quick or Acid Test Ratio
Quick ratio = [Current Assets – Inventory]/ Current liabilities

Current Assets – Inventory

1,750

Current liabilities

1,100

Quick/Acid  Test ratio

1.6

An acid test ratio of 1.6 shows that the company has a healthy liquidity level since it can be able to comfortably pay its short-term creditors using the most liquid assets (inventory not included).
3. Working Capital
Working Capital = current Assets - Current liabilities

 = 2550 - 1100

= 1450

This figure shows that the financial position of the company is fine. Having a positive working capital means that the company has enough liquid resources to pay its short-term liabilities when they fall due hence it cannot be declared bankrupt easily.
4. Debt to Worth (or Owners Equity) Ratio
Owners Equity = Debt/ Equity

Debt

17,600

Equity

26,700

Owners Equity

65.9%

An owners’ equity of 65.9% is a sign of financial weakness because it means that the company is highly indebted and may not be able to borrow in the long term.

5. ROA (Return on Assets).
   ROA= Net Income/ Total Assets

Net Income

15,000

Total Assets

44,300

ROA

33.8%

Return on Assets of 33.8% shows that the management is relatively effective in investing the company’s assets to generate income.

6. Earnings Per Share
   EPS = Net Income/ average outstanding shares

Net income

15,000

Average outstanding shares

1,000

15

This figure means that each share has been generating $15 of net income, which is an indication that the company has been fairly profitable.

7. Inventory Turnover
   Inventory Turnover – Sales /Inventory

Sales

1,000,000

Inventory

750

Inventory Turnover

1,3331/3 times

 This figure means that the company sells and replaces inventory 1, 3331/3 times per year, which is quite healthy. It means that the company stock is moving very fast (Bernstein and Wild 25).