Question

The assets of Dallas & Associates consist entirely of current assets and net plant and equipment. The firm has total assets of $2.5 million and net plant and equipment equals $2 million. It has notes payable of $150,000, long-term debt of $750,000, and total common equity of $1.5 million. The firm does have accounts payable and accruals on its balance sheet. The firm only finances with debt and common equity, so it has no preferred stock on its balance sheet.1. What is the company’s total debt?2. What is the amount of total liabilities and equity that appears on the firm’s balance sheet?3. What is the balance of current assets on the firm’s balance sheet? 4. What is the balance of current liabilities on the firm’s balance sheet?5. What is the amount of accounts payable and accruals on its balance sheet? [Hint: Consider this as a single line item on the firm’s balance sheet.]6. What is the firm’s net working capital?7. What is the firm’s net operating working capital?8. What is the explanation for the difference in your answers to parts 6 and 7?

Answer 1

Answer:

(1) Company's Total Debt  Balance                = $900,000

(2) Total Liabilities & Equity  Balance             =$2,500,000

(3) Current Assets Balance                             =$500,000

(4)Current Liabilities Balance                          =$250,000

(5)Account payable & accruals balance         =$100,000

(6)Firm's Net working Capital                          =$250,000

(7)Firm's Net Operating Working Capital        =$400,000

(8) Difference                                                     =$150,000

Explanation:

(1) Total debt =Long-term debt+Notes payable

                      = 750,000+150,000

                      =$900,000

(2)Total liabilities & equity balance = 2,500,000. This is so because total assets are being financed by total liabilities and equity.

Hence, total assets = total equity+total liabilities

(3)Value of the firm's total assets =Net Plant equipment +current Assets

2,500,000=2,000,000+current assets(CA)

Hence, CA =$500,000.

(4) Current Liabilities(CL) Balance = Value of notes payable+Account payable(AP) & accruals

Current liabilities(CL) Balance = $150,000+$100,000

  Hence, CL Balance =$250,000.

(5) Total Assets =Long-term debt+B=Notes payable+Account payable & accruals(Total Liabilities) +Equity

2,500,000= 750,000+150,000+AP & Accruals +1,500,000

AP & Accruals = $100,000.

(6) Firm's Net working Capital ( FNWC)       = CA-CL

                                                                      =500,000-250,000

                                       Hence, FNWC       =$250,000

(7)Firm's Net Operating Working Capital (FNOWC)=Current Operating Assets-Current Operating Liabilities.

Hence, FNOWC = 500,000-100,000

                           =$400,000.

(8) When calculating Net Operating working capital, it is only operating liabilities that are deducted from CA. Operating liabilities means non-interest current liabilities used primarily to carry out business operation and payable within next one year.

Hence, notes payable is added to CL when calculating net working capital but omitted from CL when calculating net operating working capital.