Presented below are the condensed financial statements for the Mountain Company: Year 2 Year 1
Cash $14,800 $9,800
Accounts receivable 13,750 14,700
Inventory 16,700 14,200
Marketable securities 12,950 8,700
Equipment, net 72,500 77,500
Total assets $130,700 $124,900
Accounts payable $10,500 $13,500
Income taxes payable 5,000 9,650
Common stock 61,000 54,750
Retained earnings 54,200 47,000
Total liabilities 4455488 4263829
Shareholders' Equity
Share Capital 548979 548977
Equity Reserves 106655 97514
Hedge Reserves 6856 (1902)
Retained Earnings 1640077 1614266
Total Shareholders' equity 2302567 2258855
Total Liabilities and
Shareholders' Equity 6758055 6522684
The net income for 2018 and 2017 were $91,465 and $279,058 respectively.
A) Provide a definition for the term ‘current liability.’
B) Why is the liabilities section of the statement of financial position of primary significance to bankers, creditors and other users of the financial statements?
C) The accountant, in analysing the Statement of Financial Position, observed that the unearned revenue has increased in the current year when compared to the prior year. Is this a positive or negative indicator about the company’s liquidity? Explain.
D) Evaluate the company’s liquidity and financial flexibility by calculating and analysing the following ratios for the two year period.
(i) Current ratio
(ii) Acid Test Ratio
(iii) Deb-to-total Assets
(iv) Rate of return on Assets
E) On May 20, 2018 a passenger was injured while disembarking one of the company’s aeroplane. This was partially the result of his own negligence. The passenger sued Raleigh Airlines Ltd. for $1,000,000. Raleigh’s legal counsel believes it is possible but not probable that the outcome of the suit will be unfavourable and that the settlement would cost the company from $500,000 to $800,000. Discuss the proper accounting treatment, including any required disclosure for the situation.