Learning Objective 4 ED-21 Analyzing the ability to pay liabilities Big Bend Pho

Question

Learning Objective 4 ED-21 Analyzing the ability to pay liabilities Big Bend Photo Shop has asked you to determine whether the companys ability to pay current liabilities and total liabilities improved or deteriorated during 2016. To answer this question, you gather the following data: d. 2016 0.61 2016 2015 5 56.000 51,000 Cash Short-term Investments Net Accounts Receivable Merchandise Inventory Total Assets Total Current Liabilities Long-term Notes Payable Income from Operations Interest Expense 31,000 134,000 257,000 540,000 285,000 46,000 170,000 54,000 0 136,000 297,000 550,000 202,000 58,000 178,000 45,000 Compute the following ratios for 2016 and 2015, and evaluate the company's ability to pay its current liabilities and total liabilities: a. Current ratio b. Cash ratio c. Acid-test ratio d. Debt ratio e. Debt to equity ratio

Explanation / Answer

Please hit LIKE button if this helped. For any further explanation, please put your query in comment, will get back to you. 2016 2015 Paying Ability Current Assets Cash+Short Term Investment+Accounts Receivable+Invenotry 478000 484000 Total Assets 540000 550000 Current Liabilities 285000 202000 Long Term Note Payable 46000 58000 Total Liabilities Current Liabilities+Long Term Note 331000 260000 Equity Total Asset-Total Liabilities 209000 290000 a. Current Ratio Current Assets/Current Liabilities 478000/285000 484000/202000                                          1.68                                          2.40 Current Ratio is down means payment ability has reduced b. Cash Ratio (Cash+Cash Equivalent)/Current Liabilities (56000+31000)/285000 (51000+0)/202000 (Assumint short term investment is less than three month and hence cash equivalent)                                          0.31                                          0.25 Cash Ratio has increase indicating improving paying ability c. Acid Test Ratio (Current Assets-Inventory)/Current Liabilities (478000-257000)/285000 (484000-297000)/202000                                          0.78                                          0.93 Acid Ratio is down means payment ability has reduced d. Debt Ratio Total Liabilities/Total Assets 331000/540000 260000/550000 61.30% 47.27% High Debt ratio indicating deteriarating Paying capacity e. Debt to Equity Ratio Total Liabilities/Equity 331000/209000 260000/290000 (Can be calculated taking average of liabilities and equity as well)                                          1.58                                          0.90 High Debt to equity ratio indicating deteriarating Paying capacity

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