Balance Sheet Criticism and Liquidity Analysis of McDonald Company

BALANCE SHEET CRITICISM
1

In the given balance sheet of McDonald Company we can see that few items have been
wrongly classified. Following criticisms have been indicated:
- The prepaid insurance of $5000 which have been classified as other assets are to be
classified as current assets.
- Notes payable which are due on July 1, 2014 amounting to $ 20,000 are to be classified
as non-current liabilities since they are payable after a period of 12 months.
- Bonds payable which are due in December 2018 amounting to $ 100,000 are to be
classified as non-current liabilities since they are payable after a period of 12 months.
- Dividends payable amounting to $4000 are to be classified as current liabilities as they
are to be paid within 12 months.
Therefore we have the following:
Current assets:
Cash 40000
Marketable equity securities 20000
Accounts receivable 70000
Inventory 60000
Prepaid Insurance 5000
Total current assets 195000
Current liabilities:
Accounts payable 60000
Wages payable 10000
Dividends Payable 4000
Total current Liabilities 74000
Liquidity ratios are the financial tools which help us evaluate the debt paying ability of the
company. The current assets and current liabilities of the company are evaluated in order to
understand the cash positioning of the company. Below we have calculated the working
capital ratio, current ratio and quick ratio of McDonald Company in order to evaluate its
liquidity. (Ittelson, 2009)
2