Klingon Widgets, Inc., purchased new cloaking machinery three years ago for $6 million. The machinery can be sold to the Romulans today for $5.1 million. Klingon’s current balance sheet shows net fixed assets of $3.4 million, current liabilities of $895,000, and net working capital of $235,000. If the current assets and current liabilities were liquidated today, the company would receive a total of $1.15 million cash. a. What is the book value of Klingon’s total assets today? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.) b. What is the sum of the market value of NWC and the market value of fixed assets? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567.)
Answered on
a. The book value of Klingon's total assets today can be calculated as follows:
First, recall that the net working capital (NWC) is defined as current assets minus current liabilities. According to the information provided, Klingon has net working capital of $235,000.
Next, we are told the company's current balance sheet shows net fixed assets of $3.4 million. To find the book value of total assets, we need to add the net working capital to the book value of the net fixed assets:
Book value of total assets = Net working capital + Net fixed assets Book value of total assets = $235,000 + $3,400,000 Book value of total assets = $3,635,000
Therefore, the book value of Klingon's total assets today is $3,635,000.
b. The sum of the market value of NWC and market value of fixed assets can be calculated by looking at the cash proceeds from liquidating current assets and current liabilities and the market value of the fixed assets:
Market value of NWC = Cash proceeds from liquidating current assets minus current liabilities Market value of NWC = $1,150,000 (since if liquidated, the company would receive $1.15 million cash which includes both current assets and the elimination of current liabilities)
Market value of fixed assets is the hypothetical sales value today, which is given as $5.1 million.
Sum of market value of NWC and market value of fixed assets = Market value of NWC + Market value of fixed assets Sum = $1,150,000 + $5,100,000 Sum = $6,250,000
So, the sum of the market value of Klingon's NWC and the market value of its fixed assets is $6,250,000.
Extra: In financial accounting, "book value" signifies the value of an asset as reported on the company's balance sheet. It is calculated as the original cost of the asset minus any accumulated depreciation, amortization, or impairment costs against the asset. The book value may differ significantly from "market value," which represents the price at which assets can be bought or sold on the open market. Market value can be influenced by many factors, including the state of the economy, technological advancements, and industry trends.
Net working capital (NWC) is a measure of a company's liquidity and short-term financial health. If the NWC is positive, it suggests that the company has enough short-term assets to pay off its short-term liabilities. Negative NWC would imply potential liquidity issues. Market value of fixed assets, on the other hand, refers to the price at which these long-term assets could be sold in the marketplace, which sometimes can differ quite a bit from their book value due to factors such as wear and tear, advancements in technology, or changes in market demand.