2 Assets and Liabilities
Statement of Financial Position Fundamentals
- First, My Turn!
- The following two companies, Gubba's Grub (GG) and Kenny’s Kitchen (KK) have worked hard to each create their Statement of Financial Position for 20X2, which can be found below:
Gubba’s Grub
Statement of Financial Position
As at December 31, 20X2
| Assets | ||
|---|---|---|
| Current Assets: | ||
| Cash and Equivalents | 10,000 | |
| Short-Term Investments | 22,000 | |
| Accounts Receivable | 18,000 | |
| Inventory | 15,000 | |
| Total Current Assets | 65,000 | |
| Non-Current Assets: | ||
| PP&E: | ||
| Equipment (net) | 50,000 | |
| Buildings (net) | 200,000 | |
| Total PP&E | 250,000 | |
| Intangible Assets: | ||
| Patents | 8,000 | |
| Copyrights | 11,000 | |
| Total Intangible Assets | 19,000 | |
| Total Non-Current Assets | 269,000 | |
| Total Assets | 334,000 | |
| Liabilities & Equity | ||
|---|---|---|
| Liabilities: | ||
| Current Liabilities: | ||
| Accounts Payable | 7,000 | |
| Sales Tax Payable | 1,000 | |
| Other Accrued Liabilities | 15,000 | |
| Current Portion of Long-Term Debt | 25,000 | |
| Total Current Liabilities | 48,000 | |
| Non-Current Liabilities: | ||
| Long-Term Debt (net) | 50,000 | |
| Total Liabilities | 98,000 | |
| Equity: | ||
| Common Shares | 100,000 | |
| Preferred Shares | 10,000 | |
| Contributed Surplus | 6,000 | |
| Retained Earnings | 120,000 | |
| Total Equity | 236,000 | |
| Total Liabilities & Equity | 334,000 | |
Kenny's Kitchen
Statement of Financial Position
As at December 31, 20X2
| Assets | ||
|---|---|---|
| Current Assets: | ||
| Cash and Equivalents | 15,000 | |
| Short-Term Investments | 35,000 | |
| Accounts Receivable | 20,000 | |
| Inventory | 23,000 | |
| Total Current Assets | 93,000 | |
| Non-Current Assets: | ||
| PP&E: | ||
| Equipment (net) | 125,000 | |
| Buildings (net) | 200,000 | |
| Total PP&E | 325,000 | |
| Intangible Assets: | ||
| Patents | 5,000 | |
| Copyrights | 13,000 | |
| Total Intangible Assets | 18,000 | |
| Total Non-Current Assets | 343,000 | |
| Total Assets | 436,000 | |
| Liabilities & Equity | ||
|---|---|---|
| Liabilities: | ||
| Current Liabilities: | ||
| Accounts Payable | 5,000 | |
| Sales Tax Payable | 1,000 | |
| Other Accrued Liabilities | 10,000 | |
| Current Portion of Long-Term Debt | 20,000 | |
| Total Current Liabilities | 36,000 | |
| Non-Current Liabilities: | ||
| Long-Term Debt (net) | 40,000 | |
| Total Liabilities | 76,000 | |
| Equity: | ||
| Common Shares | 130,000 | |
| Preferred Shares | 20,000 | |
| Contributed Surplus | 10,000 | |
| Retained Earnings | 200,000 | |
| Total Equity | 355,000 | |
| Total Liabilities & Equity | 436,000 | |
We can analyze the two companies using the ratios we learned above starting with Gubba’s Grub:
[latex]\begin{equation*} \begin{aligned} {\textbf{GG's}\atop \textbf{Current Ratio}}\;&=\;\dfrac{\text{Current Assets}}{\text{Current Liabilities}} \\ \, \\ &=\;\frac{\$\,65,000}{\$\,48,000} \\ \, \\ &=\;\mathbf{1.35} \\ \, \\ \hline \\ {\textbf{GG's}\atop \textbf{Quick Ratio}}\;&=\;\dfrac{\text{Current Assets}-\text{Inventory}-\text{Prepaid Expenses}}{\text{Current Liabilities}} \\ \, \\ &=\;\frac{\$\,65,000-\$\,15,000}{\$\,48,000} \\ \, \\ &=\;\mathbf{1.04} \\ \, \\ \hline \\ {\textbf{GG's}\atop \textbf{Debt-to-Assets Ratio}}\;&=\;\dfrac{\text{Total Liabilities}}{\text{Total Assets}} \\ \, \\ &=\;\frac{\$\,98,000}{\$\,334,000} \\ \, \\ &=\;\mathbf{0.29} \\ \end{aligned} \end{equation*}[/latex]
And then calculate for Kenny’s Kitchen:
[latex]\begin{equation*} \begin{aligned} {\textbf{KK's}\atop \textbf{Current Ratio}}\;&=\;\dfrac{\text{Curent Assets}}{\text{Current Liabilities}} \\ \, \\ &=\;\dfrac{\$\,93,000}{\$\,36,000} \\ \, \\ &=\;\mathbf{2.58} \\ \, \\ \hline \\ {\textbf{KK's}\atop \textbf{Quick Ratio}}\;&=\;\dfrac{\text{Current Assets}-\text{Inventory}-\text{Prepaid Expenses}}{\text{Current Liabilities}} \\ \, \\ &=\;\dfrac{\$\,93,000-\$\,23,000}{\$\,36,000} \\ \, \\ &=\;\mathbf{1.94} \\ \, \\ \hline \\ {\textbf{KK's}\atop \textbf{Debt-to-Assets Ratio}}\;&=\;\dfrac{\text{Total Liabilities}}{\text{Total Assets}} \\ \, \\ &=\;\dfrac{\$\,76,000}{\$\,436,000} \\ \, \\ &=\;\mathbf{0.17} \\ \end{aligned} \end{equation*}[/latex]
Summary and Analysis
| Ratio | Gubba's Grub | Kenny's Kitchen |
|---|---|---|
| Current Ratio | 1.35 | 2.58 |
| Quick Ratio | 1.04 | 1.94 |
| Debt-to-Assets | 0.29 | 0.17 |
We can see that Kenny’s Kitchen is in a much more favourable position than Gubba’s Grub. Remembering for the current and quick ratio, a higher ratio is favourable due to the assets being in the numerator. Conversely, for the debt-to-assets ratio, a lower ratio is favourable due to the liabilities being in the numerator.
Great work. Thanks for working through basic accounting equation concepts and completing the activities as you go. Feel free to revisit these concepts as you move through the textbook, and to re-do any of the activities. You’re now in a good position to look at transactions: events that make assets, liabilities, and/or equity balances change. Such transactions might be selling to a customer, buying inventory, paying employees, or taking on debt. Let’s move to the next chapter and take a look.
