The proprietors of two businesses, L.L. Sams Company and Melinda Garcia Career Services, have sought business loans from you. To decide whether to make the loans, you have requested their balance sheets.

Solely on the basis of these balance sheets, to which entity would you be more comfortable lending money? Explain fully, citing specific items such as the accounting equation and amounts from the balance sheets. In addition to balance sheet data, what other information would you require?

Please see attatchment for the balance sheets.
Thanks for your help.

Please refer to This thread (https://www.askmehelpdesk.com/finance-accounting/announcements.html)

Just to add to Curlyben's response...

What do you think the answer is and why?

Then we will tell you what we think.

The entity I would be more comfortable loaning money to would be L.L. Sams Company. This company has more economic resources that they will benefit from in the future. They also have less in liabilities than Melinda Garcia Career services. Their balance sheet also indicates they have twice as much in Owners Equity than the career service. It appears that L.L. Sams Company would be more likely able to repay the loan because they only have $30,000.00 in liabilities, whereas Melinda Garcia Career Services has $174,000.00 in liabilities. They also have a considerable less amount in capital. Although they show more in assetts. L.L. Sams Company will be the more likely company for fast growth.

Good points.

I agree with you. I think LL Sams is the better of the 2 to give a loan to.

Now let's talk financial ratios.

Financial ratios help you in determining a company's liquidity, solvency, etc.

Some to consider with just a balance sheet are:

Current Ratio (a liquidity ratio that measures a company's ability to pay short-term obligations) = Current Assets / Current Liabilities

Quick Ratio (an indicator of a company's short term liquidity) = (Current Assets – Inventories - Prepaids) / Current Liabilities

LL Sams
Current Ratio = 108,500 / 12,000 = 9.04
Quick Ratio = 23,500 / 12,000 = 1.96

Melinda
Current Ratio = 19,000 / 6,000 = 3.17
Quick Ratio = 19,000 / 6,000 = 3.17


Other ratios to look into are:
- Debt/Asset Ratio = Total Liabilities / Total Assets (Indicates what proportion of equity and debt that the company is using to finance its assets)

- Debt/Equity Ratio = Total Liabilities / Total Shareholder's Equity (Indicates what proportion of equity and debt that the company is using to finance its assets)

HEY YOU POSTED THIS AS A POSSIBLE ANSWER TO THIS QUESTION. I AM TRYING TO FIGURE THE MATH HERE, BUT IT Doesn't SEEM TO ADD UP RIGHT.

HOW DID YOU GET 108,500?

AND DO THE FINANCIAL EQUATION(S) READ AS:

108,500 DIVIDED BY ( / ) 12,000 EQUALS ( = ) 9.04?
19,000 DIVIDED BY ( / ) 6,000 EQUALS ( = ) 3.17?

AND SO ON?

YOU POSTED THE FOLLOWING:

"Current Ratio (a liquidity ratio that measures a company's ability to pay short-term obligations) = Current Assets / Current Liabilities

Quick Ratio (an indicator of a company’s short term liquidity) = (Current Assets – Inventories - Prepaids) / Current Liabilities

LL Sams
Current Ratio = 108,500 / 12,000 = 9.04
Quick Ratio = 23,500 / 12,000 = 1.96

Melinda
Current Ratio = 19,000 / 6,000 = 3.17
Quick Ratio = 19,000 / 6,000 = 3.17 .........."

Yes you did your math correct.

As for current assets of 108,500, that is calculated as:

Cash 9,000
AR 14,000
Inv 85,000
Supplies 500

Total = 108,500