Question

One of your team members is struggling with preparation of balance sheet and he needs your assistance in completing it. He has come up with following missing information. You are required to complete this Balance sheet.

Assets Liabilities & Equity
Cash $ 100,000 Current Liabilities
Receivables Long Term Debt
Inventory Total Debt
Plant Common Equity $ 600,000
Total Assets Total Claims

Additional Information:
Current Ratio is 2.5 ; Average Collection Period is 54 days ; Total Debt to Total Assets 40 percent ; Total Asset Turnover is 2 ; Inventory Turnover 5.

Answer 1

Balance sheet

Cash $100,000 Current Liabilities $320,000

Receivables $300,000 Long Term Debt $80,000

Inventory $400,000 Total Debt $400,000

Plant $200,000 Common Equity $600,000

Total Assets $1,000,000 Total Claims $1,000,000

Step-by-step explanation:

a) Total Debt to Total Assets 40 percent:

This means that Equity = 60% (100 - 40%)

If Equity is 60% = $600,000, total claims or assets will be equal to $600,000/60% = $1,000,000

Therefore, total debt = $400,000 (40% of $1,000,000)

b) Total Asset Turnover is 2:

If total assets = $1,000,000 and the total asset turnover is 2 or Turnover/Assets = 2, where total assets = $1,000,000,

Therefore, Turnover = $2,000,000 ($1,000,000 * 2)

c) Inventory Turnover is 5:

Inventory Turnover = Turnover/Inventory = 5

= $2,000,000/Inventory = 5

Inventory = $2,000,000/5 = $400,000

d) Average Collection Period is 54 days:

= Accounts Receivable/Sales x 365 = 54

Accounts Receivable = $2,000,000/365 * 54 = $296,000 or approximately $300,000

Current assets:

Cash = $100,000

Receivables $300,000

Inventory = $400,000

Total = $800,000

e) Current liabilities = Current assets/2.5

= $800,000/2.5

= $320,000

f) Plant = Total assets - current assets

= $1,000,000 - $800,000

= $200,000

g) Long term debt = Total debt - Current liabilities

= $400,000 - $320,000

= $80,000