The comparative financial statements of Newton Cosmetic Supply for 2018, 2017, a
ID: 2440504 • Letter: T
Question
The comparative financial statements of Newton Cosmetic Supply for 2018, 2017, and 2016 include the data shown here: 2018 2017 2016 Balance sheet-partial Current Assets $ 80,000 150,000 310,000 360,000 50,000 950,000 530,000 $ 50,000 $ 30,000 Cash Short-term investment Accounts Receivable, Net Merchandise Inventory Prepaid Expenses Total Current Assets 170,000 260,000 335,000 125,000 220,000 330,000 30,000 845,000 630,000 35,000 740,000 670,000 Total Current Liabilities Income statement-partial Net Sales (all on account) 5,850,000 5,110,000 425,000 Requirements 1. Compute these ratios for 2018 and 2017: a. Acid-test ratio (Round to two decimals.) b. Accounts receivable turnover (Round to two decimals.) c. Days' sales in receivables (Round to the nearest whole day.) 2. Considering each ratio individually, which ratios improved from 2017 to 2018 and which ratios deteriorated? Is the trend favorable or unfavorable for the company?Explanation / Answer
Answer for 1:
a) Acid test ratio:
for 2017:
Acid-test ratio=Liquid assets/Current liability
Liquid assets include all current assets, excluding inventory and prepaid expenses.
Liquid assets= Cash+Accounts receivables+merchandise inventories
=50,000+170,000+260,000= $480,000
Current liability= $ 630,000
Acid test ratio=480,000/630,000 =0.76
For 2018:
Liquid assets= Cash+Accounts receivables+merchandise inventories
=80,000+150,000+310,000= $540,000
Current liability= $ 530,000
Acid test ratio=540,000/530,000 =1.02
b) Accounts receivable ratio:
for 2017:
Accounts receivable ratio=Net credit sales/Average debtors
Net sales given= 5,110,000
Average debtors= Opening debtors+closing debtors/2
= 220,000+260,000/2= 240,000
= 5,110,000/240,000 =21.29 times
For 2018:
Net sales given= 5,850,000
Average debtors= Opening debtors+closing debtors/2
= 260,000+310,000/2= 285,000
= 5,850,000/285,000 =20.53 times
c) Day”s sales in receivables:
For 2017:
Day’s in sales receivable= Days in a year/Debtors turnover ratio or Accounts receivable ratio
Days in a year =365 days
Accounts receivable ratio =21.29 times
= 365/21.29 =17.14 days
For 2018:
Accounts receivable ratio =20.53 times
= 365/20.53 =17.78 days
Answer for 2:
Acid test ratio 2017= 0.76, 2018 = 1.02. Improved in the year 2018. This show’s favourable to the company. Because the standard Acid test ratio is 1:1. In the year 2018 the actual acid test ratio crossed the standard ratio.
Accounts receivable ratio 2017=21.29 times, 2018= 20.53 times. Decreased in the year 2018. If number of times per year is high, it indicate more number of times sales are made. But in the year 2018 accounts receivable time is only 20.53 times.
Day’s sales in receivables 2017=17.14 days, 2018= 17.78 days. Decreased in the year 2018, i.e., number of days collection period increased it was not good to the company.
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