Globus Enterprises Year-End Balances - Assignment Example

Globus Enterprises Year End Balances Question Globus Enterprises Balance Sheet as at December 31, 20XX $ $ $ Fixed Assets: Land 29,400 Equipment 25,900 Total fixed assets 55,300 Current assets: Cash 81,200 Accounts Receivable 51,800 Supplies 9,100 Prepaid Insurance 8,400 Total Current assets 150,500 Less: Current Liabilities Accounts Payable 20,650 Notes Payable 43,050 (63,700) Net Current Assets (Working Capital) 86,800 Net Assets 142,100 Financed By: Capital 91,700 Add: Net profit 20,650 Long-term Liability (Mortgage) 29,750 142,100 Question 2 Globus Enterprises Income Statement for the year ending December 31, 20XX $ Revenues 263,200 Less: Expenses   Wages Expense 121,800 Rent Expense 65,100 Supplies Expense 50,400 Miscellaneous Expense 5,250 (242,550) Net Profit 20,650 Question 3 (a) Current Ratio The current ratio is calculated as follows: Current Ratio = Current Assets/Current Liabilities Current Ratio = ($81,200 + $51,800 + $9,100 + $8,400) / ($20,650 + $43,050) = $150,500/$63,700 = 2.37:1 The current ratio is used to assess the liquidity position of the company and to determine its position in terms of meeting emergency cash requirement needs. It is generally believed that the ideal current ratio is in between 1.5-2. The calculation of the current ratio of Globus Enterprises indicates that it is too high which means that the company is holding too much amount of liquid assets. holding a large quantity of liquid assets at hand can prove to be risky for the business in certain situations. From the analysis of the current assets, it is evident that it has enormous amount of cash i.e. $81,200 and it is believed that it should be allotted either in attractive investments or transferred to retained profit account. The current ratio of 2.37 shows that the company has sufficient funds for fulfilling its liabilities and it should consider about decreasing the amount of current assets to a significant level so that there is proper balance between the assets and liabilities of short term period within the organization. This balance between the assets and liabilities would prove to be useful for the business in the long term and allow the organization to gain competitive advantage. (b) Net Working Capital The net working capital formula is: Net Working Capital = Current Assets – Current Liabilities Net Working Capital = ($81,200 + $51,800 + $9,100 + $8,400) - ($20,650 + $43,050) = $150,500 - $63,700 = $86,800 The net working capital is an important indicator about the proper allocation of a company’s current assets and it is used to review the financial health of the company for one year. Considering the working capital of Globus Enterprises which is $86,800, it is a clear sign of the organization that it is in effective utilization of the company’s resources. It shows that the company has a positive working capital and has appropriate amount of liquid cash to meet the immediate monetary requirements of the business. Positive working capital for the business is a highly advantageous position for the business. Businesses require capital for expansion and other investments and positive working capital would assist the business in accomplishing such goals. It has to make sure that its working capital ratio is grown in an upward direction in upcoming years so that it does not have to face any sort of financial problem and it can smoothly run its business operations. The figure also ensures that it is able to pay off its current liabilities without any difficulty and it can even bear any expense required for the prepayments with convenience. (c) Debt to equity Ratio The debt to equity ratio is calculated by the following formula: Debt to equity ratio = Total debt/Total equity Debt to equity ratio = (Current Liabilities + Long-term liabilities) / Capital = ($63,700 + $29,750) / $91,700 = $93,450 / $91,700 = 1.1:1 Globus Enterprises has debt to equity ratio of 1.1 which is a good sign of the company’s internal health. For every organization, the ideal ratio is in between 1-2 and the company’s figure shows that it has kept a proper balance between its debt and equity requirements. However, it is recommended that more money in the company is invested in the firm for the purpose of equity so that the organization has firm control over its financial health. remaining financially stable and healthy is a need for every organization for remaining successful in the long term. Currently, the company does not have to worry about any problems related to its ratio as it has a well-balanced leverage position and it is neither too high nor too low for its survival in the market. Hence, the company’s leverage performance is appropriate and justified with the changing structures of the market. (d) Leverage Ratio The leverage ratio formula is represented by the formula as follows: Leverage Ratio = Total Assets/Total Equity Leverage Ratio = (Current Assets + Fixed Assets) / Capital = ($150,500 + $55,300) / $91,700 = $205,800 / $91,700 = 2.24:1 The primary reason that leverage ratio is used is to determine the company’s ability to efficiently utilize its resources and make investments in its valuable assets in the right manner. Considering Globus Enterprise’s leverage ratio which is 2.24, it signals that the company has allocated huge amount of money in its assets and it even has set aside appropriate amount of capital. Although having a ratio above than 2 is good but it does not mean that the company should strive to maintain this ratio; the ratio will have to be lowered down in between 1.5-2 so that its leverage point is competitive. Competitive positions in terms of financial stability needs to be constantly monitored by the business. Hence, the leverage ratio of the organization is fine and it shows that it has a decent stance in terms of allocating resources effectively; but it needs to consider other alternatives to ensure that it can prosper successfully in years ahead and does not have to get worried about maintaining a sustainable financial standing for its smooth performance. (e) Return on equity The return on equity is calculated by the following formula: Return on equity = (Net Profit/Total Equity) x 100 Return on equity = ($20,650 / $91,700) x 100 = 0.225 x 100 = 22.5% In order to make sure that the company is earning appropriate amount of money on its invested money, return of equity is the most commonly used ratio. The analysis of Globus Enterprises financial statements show that it has a well performing business and a return on equity of 22.5% is a clear indication about its excellence within the respective industry. The owners have ensured that they have allocated all of their resources effectively that have helped them in meeting their organizational objectives and it has a bright chance of growing successfully in the future. Hence, Globus Enterprises is the best example for those companies that want to learn the ways in which they should apportion their resources and earn reasonable amount of returns on their equity. Overall, the position of the company is good and positive; however, there are certain areas that it needs to work on so that it is able to avoid any type of adverse situation in the long-term and can prosper smoothly and successfully in the forthcoming years. All businesses strive to become a financially stable and competitive organization in its industry. Businesses need to plan their financial resources accordingly and also ensure that they make future investments in the right manner so that desired goals and objectives are successfully achieved by the organization. Read More