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    curiouskjj's Avatar
    curiouskjj Posts: 3, Reputation: 1
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    #1

    Aug 30, 2006, 03:12 PM
    which company to lend money to?
    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.
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    Curlyben's Avatar
    Curlyben Posts: 18,514, Reputation: 1860
    BossMan
     
    #2

    Aug 30, 2006, 03:15 PM
    Please refer to This thread
    CaptainForest's Avatar
    CaptainForest Posts: 3,645, Reputation: 393
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    #3

    Aug 30, 2006, 03:49 PM
    Just to add to Curlyben's response...

    What do you think the answer is and why?

    Then we will tell you what we think.
    curiouskjj's Avatar
    curiouskjj Posts: 3, Reputation: 1
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    #4

    Aug 30, 2006, 04:09 PM
    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.
    CaptainForest's Avatar
    CaptainForest Posts: 3,645, Reputation: 393
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    #5

    Aug 30, 2006, 04:21 PM
    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)
    j_rivera_03's Avatar
    j_rivera_03 Posts: 1, Reputation: 1
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    #6

    Mar 29, 2008, 07:00 PM
    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 .........."
    CaptainForest's Avatar
    CaptainForest Posts: 3,645, Reputation: 393
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    #7

    Mar 29, 2008, 09:17 PM
    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

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