Use Worksheet 2.1. Elizabeth Walker’s banker has asked her to submit a personal

Question

Use Worksheet 2.1. Elizabeth Walker’s banker has asked her to submit a personal balance sheet as of June 30, 2007, in support of an application for a $3,000 home improvement loan. She comes to you for help in preparing it. So far, she has made the following list of her assets and liabilities at June 30, 2007: Cash on hand $ 70 Balance in checking account 180 Balance in money market deposit account with Mid-American Savings 650 Bills outstanding: Telephone $ 20 Electricity 70 Charge account balance 190 Visa 180 MasterCard 220 Taxes 400 Insurance 220 1,300 Condo and property 68,000 Home mortgage loan 52,000 Automobile: 2003 Honda Civic 10,000 Installment loan balances: Auto loans 3,000 Furniture loan 500 3,500 Personal property: Furniture 1,050 Clothing 900 1,950 Investments: U.S. government savings bonds 500 Stock of WIMCO Corporation 3,000 3,500 From the data given, prepare Elizabeth Walker’s balance sheet, dated June 30, 2003 (follow the balance sheet form shown in Worksheet 2.1). Then evaluate her balance sheet relative to the following factors: (a) solvency, (b) liquidity, and (c) equity in her dominant asset.

Explanation / Answer

Solvency :

Solvency is nothing but Leverage ratio it identifies the going concern. To check the solvency one can calculate the different ratios like debt equity ratio.

Solvency ratio = PAT+depreciation/(short and long term liabilities)

Well since Elizabeth walker has taken home loan of 52,000 and honda civic loan of 10,000 and auto loans of 3,000 , furniture loan 500 and personal property 3500 it shows that the liabilities is high compared o the profit and depreciation because the source of income for elizabeth is investment and he has not invested much in securities where he can reap income from it. Therefore the solvency of elizabeth is very weak

Liquidity :

Elizabeth and stock and kept all his money and locked up either in fixed assets or investment there is not such liquidity in hand to pay off the debts

Liquidity ratio=
Current asset+inventories / (current liablities)

Since elizabeth has less current asset in his balance sheet therefore the liquidity position of Elizabeth was not strong.

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