# Finance problem identification and evaluation of current liabilities

June 8, 2016

1) Tony Garcia opened a small motorcycle repair shop, Garcia Cycle Repair, on January 2, 2009. The shop also sells a limited number of motorcycle parts. In January 2010, Garcia realized he had never filed any tax reports for his business and therefore probably owes a considerable amount of taxes. Since he has limited experience in running a business, he has brought you all his business records, including a checkbook, canceled checks, deposit slips, suppliers’ invoices, a notice of annual property taxes of \$2,310 due to the city, and a promissory note to his father-in-law for \$2,500. He wants you to determine what his business owes the government and other parties.

You analyze all his records and determine the following as of December 31, 2009:

Unpaid Invoices: \$9000
Parts Sales (excludes tax): 44270
Costs of Parts Sold: 31125
Salaries: 18200
Repair Revenues: 60300
Current Assets: 16300
Motercycle Inventory: 11750

You learn that the company has deducted \$476 from the two employees’ salaries for federal income taxes owed to the government. The current social security tax is 6.2 percent on maximum earnings of \$102,000 for each employee, and the current Medicare tax is 1.45 percent (no maximum earnings). The FUTA tax is 5.4 percent to the state and 0.8 percent to the federal government on the first \$7,000 earned by each employee, and both employees earned more than \$7,000. Garcia has not filed a sales tax report to the state (5 percent of sales).

1. Given these limited facts, determine Garcia Cycle Repair’s current liabilities as of December 31, 2009.

2. What additional information would you want from Garcia to satisfy yourself that all current liabilities have been identified?

3. Evaluate Garcia’s liquidity by calculating working capital, payable turnover, and day’s payable. Comment on the results. (assume average accounts payable were the same as year-end account payable.)

The answer- the total current liabilities: \$20,152.10