Question

A company has the opening balance for the following accounts: Cash $100, Accounts Receivable $0, Inventory...

A company has the opening balance for the following accounts: Cash $100, Accounts Receivable $0, Inventory $600, Liabilities $0, Total Equity $700. The firm sells all inventory on credit for $800 and securitized the accounts receivable receiving $850 in cash from the SPE. Calculate the company’s Net Income, Return on Assets ratio and Debt to Assets ratio assuming 1) the transaction is recorded as a sale (10pts), and 2) the transaction is recorded as a secured borrowing

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Answer #1

Answer :

Assets

Cash = $100 + $850 = $950

Account Receivale = $800

Total = $1,750

Liabilities

Equity = $700

Profit on sale = $200

Secured Borrowing = $850

Total = $1,750

Calculation of Net Income, Return on Assets ratio and Debt to Assets ratio :

Net Income = Sales - Inventory

= $800 - $600

= $200

Return on Assets ratio = Net Income / Total Assets

= $200 / $1,750

= 0.1143 or 11.43%

Debt to Assets ratio = Total Debt / Total Assets

= $850 / $1,750

= 0.4857 or 48.57%

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