EXERCISE 15-3 Financial Ratios for Short-Term Creditors Refer to the data in Exe

Question

EXERCISE 15-3 Financial Ratios for Short-Term Creditors
Refer to the data in Exercise 15-2 for Heritage Antiquing Services.
   
Required:
Compute the following financial data for short-term creditors for this year:
1.      Working capital.
2.      Current ratio.
3.      Acid-test ratio.
4.      Accounts receivable turnover.
5.      Average collection period.
6.      Inventory turnover.
7.      Average sale period.

EXERCISE 15-4 Financial Ratios for Long-Term Creditors
Refer to the data in Exercise 15-2 for Heritage Antiquing Services.
   
Required:
Compute the following financial ratios for long-term creditors for this year:
1.      Times interest earned ratio.
2.      Debt-to-equity ratio.

Explanation / Answer

Liabilities=22,680/19,400 = 1.17
2.      Current ratio.= Current Assets/Current Liabilities=22,680/19,400 = 1.17
3.      Acid-test ratio.= (Current Assets-Inventory)/Current Liabilities = (22,680-12,000)/19,400 = 0.55
4.      Accounts receivable turnover. = Sales/ Avg Accounts receivable = 66,000/7,750 = 8.52
5.      Average collection period. = 365/Accounts receivable = 365/8.52 = 42.84 days

6.      Inventory turnover. = Sales/ Average Inventory = 66,000/11,300 = 5.84
7.      Average sale period. = 365/ Inventory turnover = 365/5.84 = 62.50 days

Compute the following financial ratios for long-term creditors for this year:
1.      Times interest earned ratio. = Net income/Interest expense =4,100/800 = 5.12 times
2.      Debt-to-equity ratio.= Total liabilities/Total Equity = 27,400/40,080 = 0.68

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