Question

The assets of Dallas & Associates consist entirely of current assets and net plant and equipment, and the firm has no excess cash. The firm has total assets of $2.7 million and net plant and equipment equals $2.3 million. It has notes payable of $150,000, long-term debt of $748,000, and total common equity of $1.55 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?

Repeat part 1 through 5 with the following new information: Total assets of $4 million, net plant and equipment of $3 million, notes payable of $500,000, long-term debt of $950,000, and total common equity of $2 million, and preferred stock of $0.5 million.

Answer 1

Step-by-step explanation:

1.Total Debt = Total Assets – Total Equity = 2,700,000 – 1,550,000

= $1,150,000

2.Total assets = Total liabilities +Total equity = $2,700,000

3.Current Assets = Total Assets – Plant and Equipment = 2,700,000-2,300,000 = 400,000

4.Current Liabilities = Total Liabilities – Long term debt = 1,150,000 – 748,000 = $402000

5.Accounts payables and accruals = current liabilities – notes payables

= 402000 – 150,000 = $252000

6.Working capital = Current Assets – Current Liabilities = 400,000-402,000

= -2000

7.Net operating working capital = Current assets – Accounts payables and accruals = 400,000 – 252,000 = 148,000

8.Difference = -2,000-148,000 = -150,000 (indicates note payable)

Recalculation with new information:

1.Total Debt = Total Assets – Total Equity = 4,000,000 – 2,000,000 -500,000 =

= $1,500,000

2.Total assets = Total liabilities +Total equity = $4,000,000

3.Current Assets = Total Assets – Plant and Equipment = 4,000,000-3,000,000 = $1,000,000

4.Current Liabilities = Total Liabilities – Long term debt = 1,500,000 – 950,000 = $550000

5.Accounts payables and accruals = current liabilities – notes payables

= 550,000 – 150,000 = $400,000