Question

The assets of Dallas & Associates consist entirely of current assets and net plant and equipment. The firm has total assets of $2.5 million and net plant and equipment equals $2 million. It has notes payable of $150,000, long-term debt of $750,000, and total common equity of $1.5 million. The firm does have accounts payable and accruals on its balance sheet. The firm only finances with debt and common equity, so it has no preferred stock on its balance sheet.1. What is the company’s total debt?2. What is the amount of total liabilities and equity that appears on the firm’s balance sheet?3. What is the balance of current assets on the firm’s balance sheet? 4. What is the balance of current liabilities on the firm’s balance sheet?5. What is the amount of accounts payable and accruals on its balance sheet? [Hint: Consider this as a single line item on the firm’s balance sheet.]6. What is the firm’s net working capital?7. What is the firm’s net operating working capital?8. What is the explanation for the difference in your answers to parts 6 and 7?

Answer 1

Dallas & Associates has a total debt of $900,000, total liabilities, and equity of $2,400,000, current assets balance of $500,000, and current liabilities balance of $100,000. Their net working capital and net operating working capital are both $400,000. There is no difference in the net working capital and net operating working capital due to the absence of preferred stock.

Step-by-step explanation:

To analyze the balance sheet of Dallas & Associates, we will answer the series of questions based on the data provided, using our understanding of a T-account, assets, liabilities, and equity.

1. Total debt: The company’s total debt is the sum of notes payable and long-term debt, which equals $150,000 + $750,000 = $900,000.
2. Total liabilities and equity: This is the sum of total debt and total common equity, which equals $900,000 + $1,500,000 = $2,400,000.
3. Balance of current assets: Given total assets of $2.5 million and net plant and equipment of $2 million, the balance of current assets is $2.5 million - $2 million = $500,000.
4. Balance of current liabilities: Since total assets must equal total liabilities and equity and we have the figures for total debt and common equity, we can calculate the balance of current liabilities as $2.5 million - $900,000 (total debt) - $1.5 million (common equity) = $100,000.
5. Accounts payable and accruals: The balance of current liabilities is the same as accounts payable and accruals, which we've calculated as $100,000.
6. Net working capital: Net working capital is current assets minus current liabilities, which equals $500,000 - $100,000 = $400,000.
7. Net operating working capital: This is the same as net working capital since there is no preferred stock or other financing involved, so again $400,000.
8. The explanation for the no difference in the answers to parts 6 and 7 is that Dallas & Associates does not have preferred stock or other securities that could affect the calculation of net working capital.

Answer 2

(1) Company's Total Debt Balance = $900,000

(2) Total Liabilities & Equity Balance =$2,500,000

(3) Current Assets Balance =$500,000

(4)Current Liabilities Balance =$250,000

(5)Account payable & accruals balance =$100,000

(6)Firm's Net working Capital =$250,000

(7)Firm's Net Operating Working Capital =$400,000

(8) Difference =$150,000

Step-by-step explanation:

(1) Total debt =Long-term debt+Notes payable

= 750,000+150,000

=$900,000

(2)Total liabilities & equity balance = 2,500,000. This is so because total assets are being financed by total liabilities and equity.

Hence, total assets = total equity+total liabilities

(3)Value of the firm's total assets =Net Plant equipment +current Assets

2,500,000=2,000,000+current assets(CA)

Hence, CA =$500,000.

(4) Current Liabilities(CL) Balance = Value of notes payable+Account payable(AP) & accruals

Current liabilities(CL) Balance = $150,000+$100,000

Hence, CL Balance =$250,000.

(5) Total Assets =Long-term debt+B=Notes payable+Account payable & accruals(Total Liabilities) +Equity

2,500,000= 750,000+150,000+AP & Accruals +1,500,000

AP & Accruals = $100,000.

(6) Firm's Net working Capital ( FNWC) = CA-CL

=500,000-250,000

Hence, FNWC =$250,000

(7)Firm's Net Operating Working Capital (FNOWC)=Current Operating Assets-Current Operating Liabilities.

Hence, FNOWC = 500,000-100,000

=$400,000.

(8) When calculating Net Operating working capital, it is only operating liabilities that are deducted from CA. Operating liabilities means non-interest current liabilities used primarily to carry out business operation and payable within next one year.

Hence, notes payable is added to CL when calculating net working capital but omitted from CL when calculating net operating working capital.