ES-25A. (Learning Objectives 6, 7: Show how to speed up cash flow from receivabl
ID: 2433141 • Letter: E
Question
ES-25A. (Learning Objectives 6, 7: Show how to speed up cash flow from receivables evaluate liquidity through ratios) Marshall, Inc., reported the following items at December 31, 2016, and 2015: A1 Balance Sheets (Summarized) 2 Year-end 2016 201 Year-end 2016 50402015 5 Current assets: 6 Cash 7 Marketable securities 22,000 11,000 Other current liabilities 107,000 109,000 8 Accounts receivable, net 54,000 68,000 Long-term liabilities20,000 21000 9Inventory tcurrentliabilities: | 15,0005 11000 Accounts payableS 16,000S 17500 194,000 190,000 10 Other current ass 11 Long-term assets 12 Total assets 13 14 Income statement (partial): 2016 15 Sales Revenue 17 6,000 6,000 Stockholders equity 148,000 148,500 $ 291,000 5 296000 Total liabilities and equity $ 291,000 5 296000 $727,000
Explanation / Answer
1. a) Acid test ratio = Quick assets / current liablities
= (Cash + Marketable securities + Accounts recievable) / (Accounts payable + other current liabilities)
= 15000+22000+54000 / 16000+107000
= 91000/123000
=0.74
b) days' sales outstanding = Accounts recievable / net sales
= ( 54000/727000 ) x 365
= 27.11 days
Analysis of Ratio.
Basically companies having acid-test or quick ratio greater 1.00 is sufficiently able to meet their short term liabilities. In other words , say if a company having acid-test ration of 1.5, it means for every $1 current current liablities company having & 1.5 liquid assets to cover this immediate obligations.
Marshall's acid-test seems to be weak. The company is not able to cover its immediate obligations with its quick assets. Company is having only $0.74 for every $1 of its immediate liabilities. The company should improve its acid test ratio.
The days' sales outstanding ratio on the other side shows how well the comapny is collecting cash from its accounts recievables . While coming to Marshall,s day's sales outstanding since the comapny's policy is sales with terms of net of 30 days, the company is almost in line with its policy. The company is able to collect its recievables within a period of 27.11 days. However the company should take actions to meet its policy that is 30 days.
2. Recommendations to speed up cash flow from recievables.
a) Making a long term good relationship with customers.
If the company is in a very friendly relation with customers, they wont delay the payments
b) Making available all mode of payment.
Allow the customers to make payment in any mode. Cheque, Credit/Debit card or directly deposit to bank etc.
c) Sending the bills promptly.
Outline the agreed terms very clearly and prompt interest will be charged for delayed payments.
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