Salvador Industries bought land and built its plant 20 years ago. The depreciation on the building...

  
 
 
 

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Salvador Industries bought land and built its plant 20 years ago. The depreciation on the building is calculated using the straight-line method, with a life of 30 years and a salvage value of $56,000. Land is not depreciated. The depreciation for the equipment, all of which was purchased at the same time the plant was constructed, is calculated using declining balance at 15 percent. Salvador currently has two outstanding loans: one for $46,000 due December 31, 2020, and another one for which the next payment is due in four years. During April 2020, there was a flood in the building because a nearby river overflowed its banks after unusually heavy rains. Pumping out the water and cleaning up the basement and the first floor of the building took a week. Manufacturing was suspended during this period and some inventory was damaged. Due to inadequate insurance, this unusual and unexpected event cost the company $106,000, net. a. Complete the balance sheet and income statement, using any of the above information that is necessary. b. Show how information from financial ratios can indicate whether Salvador Industries can manage an unusual and unexpected event, such as the flood, without threatening its existence as a viable business. First, complete the balance sheet. Start by completing the assets portion and then the liabilities and owners' equity portions. (Round amounts to the nearest whole dollar.) Current assets Cash Accounts receivable Inventories Prepaid services Long-term assets Building Total Current Assets Land Salvador Industries Balance Sheet as of June 30, 2020 Assets Equipment Less accumulated depreciation Less accumulated depreciation Total Long-Term Assets Total assets $ 224,000 490,000 352,000 2,800,000 2,008,000 152,000 535,000 Current Liabilities Accounts payable Accrued taxes Total Current Liabilities Liabilities and Owners' Equity Long-term Liabilities Mortgage Total Long-Term Liabilities Total Liabilities Owners' Equity Common shares 854,492 28,500 1,220,000 324,000 1,970,000 Total Owners' Equity Total Liabilities and Owners' Equity Now complete the income statement. (Round amounts to the nearest whole dollar. Use parentheses or a minus sign for a net loss.) Salvador Industries Income Statement for the Year Ended June 30, 2020 Revenues Gross income from sales Less Net revenue from sales. Expenses Depreciation Interest paid Other expenses Total expenses Income before taxes Taxes at 45% The current ratio is (Round to two decimal places as needed.) Now calculate the acid-test ratio. The acid-test ratio is (Round to two decimal places as needed.) Now calculate the equity ratio. Net Income (loss) b. Show how information from financial ratios can indicate whether Salvador Industries can manage an unusual and unexpected event, such as the flood, without threatening its existence as a viable business. Calculate the current ratio. The equity ratio is (Round to two decimal places as needed.) Now find the return-on-assets ratio. $ The return-on-assets ratio is %. (Round to two decimal places as needed.) 8,655,000 7,495,000 69,000 236,000 104,000 Use the financial ratios to indicate whether Salvador Industries can manage an unusual and unexpected event, such as the flood, without threatening its existence as a viable business. Select all that apply. A. The equity ratio is very high, indicating the company does not rely on debt financing, which makes it easy to cover a loss from an extraordinary event. B. The return-on-assets ratio is high, which means a loss from an extraordinary event would take only a small portion of its pre-tax income. C. The current and acid test ratios are both low, which means the company may not have the assets to cover obligations or losses from extraordinary events. D. The return-on-assets ratio is low, which means a loss from an extraordinary event would take a large portion of its after-tax income. ☐E. The current and acid test ratios are high, which mean the company has considerable security in meeting obligations and losses from extraordinary events. F. The equity ratio is slightly low, indicating reliance on debt financing, which makes it harder to cover a loss from an extraordinary event. Salvador Industries bought land and built its plant 20 years ago. The depreciation on the building is calculated using the straight-line method, with a life of 30 years and a salvage value of $56,000. Land is not depreciated. The depreciation for the equipment, all of which was purchased at the same time the plant was constructed, is calculated using declining balance at 15 percent. Salvador currently has two outstanding loans: one for $46,000 due December 31, 2020, and another one for which the next payment is due in four years. During April 2020, there was a flood in the building because a nearby river overflowed its banks after unusually heavy rains. Pumping out the water and cleaning up the basement and the first floor of the building took a week. Manufacturing was suspended during this period and some inventory was damaged. Due to inadequate insurance, this unusual and unexpected event cost the company $106,000, net. a. Complete the balance sheet and income statement, using any of the above information that is necessary. b. Show how information from financial ratios can indicate whether Salvador Industries can manage an unusual and unexpected event, such as the flood, without threatening its existence as a viable business. First, complete the balance sheet. Start by completing the assets portion and then the liabilities and owners' equity portions. (Round amounts to the nearest whole dollar.) Current assets Cash Accounts receivable Inventories Prepaid services Long-term assets Building Total Current Assets Land Salvador Industries Balance Sheet as of June 30, 2020 Assets Equipment Less accumulated depreciation Less accumulated depreciation Total Long-Term Assets Total assets $ 224,000 490,000 352,000 2,800,000 2,008,000 152,000 535,000 Current Liabilities Accounts payable Accrued taxes Total Current Liabilities Liabilities and Owners' Equity Long-term Liabilities Mortgage Total Long-Term Liabilities Total Liabilities Owners' Equity Common shares 854,492 28,500 1,220,000 324,000 1,970,000 Total Owners' Equity Total Liabilities and Owners' Equity Now complete the income statement. (Round amounts to the nearest whole dollar. Use parentheses or a minus sign for a net loss.) Salvador Industries Income Statement for the Year Ended June 30, 2020 Revenues Gross income from sales Less Net revenue from sales. Expenses Depreciation Interest paid Other expenses Total expenses Income before taxes Taxes at 45% The current ratio is (Round to two decimal places as needed.) Now calculate the acid-test ratio. The acid-test ratio is (Round to two decimal places as needed.) Now calculate the equity ratio. Net Income (loss) b. Show how information from financial ratios can indicate whether Salvador Industries can manage an unusual and unexpected event, such as the flood, without threatening its existence as a viable business. Calculate the current ratio. The equity ratio is (Round to two decimal places as needed.) Now find the return-on-assets ratio. $ The return-on-assets ratio is %. (Round to two decimal places as needed.) 8,655,000 7,495,000 69,000 236,000 104,000 Use the financial ratios to indicate whether Salvador Industries can manage an unusual and unexpected event, such as the flood, without threatening its existence as a viable business. Select all that apply. A. The equity ratio is very high, indicating the company does not rely on debt financing, which makes it easy to cover a loss from an extraordinary event. B. The return-on-assets ratio is high, which means a loss from an extraordinary event would take only a small portion of its pre-tax income. C. The current and acid test ratios are both low, which means the company may not have the assets to cover obligations or losses from extraordinary events. D. The return-on-assets ratio is low, which means a loss from an extraordinary event would take a large portion of its after-tax income. ☐E. The current and acid test ratios are high, which mean the company has considerable security in meeting obligations and losses from extraordinary events. F. The equity ratio is slightly low, indicating reliance on debt financing, which makes it harder to cover a loss from an extraordinary event.

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Balance sheet as on Jun 30 2020 Cash AR Inventories Prepaid services Total curr assets ... View the full answer