Activity 2
Activity 2
MBA-1A
March 20, 2021
ANSWERS TO ACTIVITY 2:
PROBLEM 1:
A.
Cash 74,800.00
Receivables 152,700.00
Mdse. Inventory 1,191,800.00
Prepaid Expense 95,500.00
Total Current Assets 1,514,800.00
Cash 74,800.00
Receivables 152,700.00
Total Quick Assets 227,500.00
B.
1,514,800.0
Current Asset 0 .78 times
Current Ratio =
1,939,000.0
Current Liabilities 0
C. The TSI has a current ratio of less than 1 which is .78 times, it has a fewer current asset than current liabilities.
Creditors would consider the company a financial risk because it might not be able to easily paydown its short-term
obligations. However, a low current ratio can be often supported by a strong operating cash flow. Under Long-term
creditors TSI may be forced into bankruptcy since unable to pay its short-term debts. For this reason, many bond
indentures, or contracts, contain a provision requiring that the borrower maintain at least a certain minimum current
ratio. TSI can increase its current ratio by issuing long-term debt or capital stock or by selling noncurrent assets.
D. To complete analysis of TSI’s Solvency, here are the following ratio analysis to consider:
Debt to Equity Ratio - used to measure the degree to which a company is using debt to fund operations (Leverage).
Lower ratio is preferred, as it implies that the company can pay for capital w/o relying so much on debt.
Debt to Assets – measures the percentage of a company’s assets that have been financed w/ debt (short-term/long-
term). A higher ratio indicates a degree of leverage, and consequently, financial risk.
Times Interest Earned Ratio – the higher the value, the more solvent the company. It means the day-to-day operations
are yielding enough profit to meet its interest payments.
PROBLEM 2:
A.
B.
109,643.00
C. The ABI’s current ratio is more than 2 which is 3.0 times, then the company may not be using its current assets or its
short-term financing facilities efficiently. But Creditors consider a high current ratio to be better than a low current ratio,
because a high current ratio means that the company is more likely to meet its liabilities which are due over the next 12
months.
As to the Short-term Creditors, it implies that ABI company has the ability to pay its short-term obligation since it has a
higher current ratio.
As to the Long-term Creditors, is interested also in company’s ability to repay debt. However, they’re going to look into
different ratios. Make their money by getting interest payments over a long period of time. It considers its overall ability
to pay back a long-term loan of ABI’s.
As to the Shareholders, are most interested in ABI’s ability to pay its obligation in the future. It generates enough cash
to run ABI’s operation smoothly. It has the ability to generate cash when needed.