1 Calculating ratios: solve the unknown
The current asset section of the Excalibur Tire Company’s balance sheet consists of cash, marketable securities, accounts receivable, and inventories. The December 31, 2011 balance sheet revealed the following:
Total Assets 2,800,000
Current ratio 2.25
Acid –test ratio 1.2
Debt to equity 1.8
Determine the following 2011 balance sheet items:
1. Current assets
2. Shareholder’s equity
3. Noncurrent assets
4. Long-term liabilities
2 Effect of management decisions on ratios
Most decisions made by management impact the ratios analysts use to evaluate performance. Indicate (by letter) whether each of the actions listed below will immediately increase (I), decrease (D), or have no effect (N) on the ratios shown. Assume each ratio is less than 1.0 before the action is taken.
3 Balance Sheet Errors
You recently joined the internal auditing department of Marcus Clothing Corporation. As one of your firs assignments you are examining a balance sheet prepared by a staff account.
In the course of your examination you uncover the following information pertaining to the balance sheet:
1. The company rents it facilities. The land that appears in the statement is being held for future sale.
2. The note receivable is due in 2013. The balance of 53,000 includes 3,000 of accrued interest. The next interest payment is due in July 2012.
3. The note payable is due in installments of 20,000 per year. Interest on both the notes and bonds is payable annually.
4. The company’s investments consist of marketable equity securities of other corporations. Management does not intend to liquidate any investments in the coming year.
Identify and explain the deficiencies in the statement prepared by the company’s accountant. Include in your answer items that require additional disclosure, either on the face of the statement or in a note.
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