After becoming thoroughly frustrated by engineering econ, you have decided to qu

Question

After becoming thoroughly frustrated by engineering econ, you have decided to quit engineering and start a pet spa. Your first balance sheet is shown below. $1,360 (2) Assets Current assets Cash Inventory Total current assets Fixed assets Equipment Less: Accumulated depreciation Total assets Liabilities Current liabilities (1) Accounts payable 1,300 Accrued expenses $5,915 Total current liabilities Equity $13,375 Stock (5,400) Retained earnings $15,495 Total liabilities and equity $5,000 $1,000 (3) (4) a) What are the values for cash (1), accrued expenses (2), retained earnings (3), and total liabilities and equity (4)? b) What are your current ratio, working capital, and acid-test ratio?

Explanation / Answer

(a)

(i) Cash ($) = Total Current assets - Inventory = 5,915 - 1,300 = 4,615

(ii) Accrued expenses ($) = Total current liabilities - Accounts payable = 5,000 - 1,360 = 3,640

(iii) Total liabilities and equity ($) = Total assets = 15,495

(iv) Retained earnings ($) = Total liabilities and equity - Total current liabilities - Stock = 15,495 - 5,000 - 1,000

= 9,495

(b)

(i) Current ratio = Total Current assets / Total current liabilities = $5,915 / $5,000 = 1.18

(ii) Working capital = Total Current assets - Total current liabilities = $5,915 - $5,000 = $915

(iii) Acid-test ratio = Cash / Total current liabilities = $4,615 / $5,000 = 0.92

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