Calculate and show work for: 1. Current Ratio 2.Quick Ratio 3.Working Capital 4.
ID: 2535966 • Letter: C
Question
Calculate and show work for:
1. Current Ratio 2.Quick Ratio 3.Working Capital 4. Accounts Receivable Turnover 5.Average Collection Period 6. Inventory Turnover 7. Days in Inventory 8. Debt to Total Assets Ratio 9.Gross Profit Ratio 10. Profit Margin Ratio 11.Return on Assets Ratio 12. Asset Turnover Ratio
• Do you feel that the company is able to meet its current and long term obligations as they become due?
Comment on the profitability of the company with respect to the various profitability ratios that you computed.
Would you lend money to this company for the long term?
Comment on the ability of the company to collect its receivables and mange inventory.
Accounts Payable Accounts Receivable Accumulated Depreciation-Delivery Equipment Accumulated Depreciation-Store E S23,215 10,880 15,680 32,300 6,000 S23,215 Delivery Expense Delivery Depreciation Expense-Delivery Equipment Depreciation Expense-Store Equipment Freight-in 19,680 41,800 6,000 7,000 57,000 4,000 9,500 5,060 57,000 5,060 70,000 16,305 16,30S 11,000 9,000 8,000 3,700 34,360 45,000 4,500 3,500 630,500 7,000 3,000 18,400 120,000 860,000 14,000 6,000 12,500 125,000 3,500 9,000 Retained Earnings Insurance Expense Interest Expense Interest Revenue Merchandise Inventory Notes Payable Prepaid Insurance 8,000 3,700 34,360 45,000 13,500 630,500 Purchase Discounts Purchase Returns and Allowances Rent Expense Salaries Expense Sales Sales Commissions Expense Sales Commissions Payable Sales Returns and Allowances Store Equipment Property Taxes Payable Utilities Expense 3.000 18,400 120,000 860,000 8,000 12,500 125,000 Analysis reveals the following additi onal data 1. 2. 3. 4. 5. The beginning balance of accounts receivable is $12,750 The amount of total assets at the beginning of the year is S145,921 Salaries expense is 65% selling and 35% administrative. Insurance expense is 50% selling and 50% administrative. A physical inventory was conduced for year ended December 31, 2008 and the inventory was valued at S38,100. Rent expense, utilities expense, and property tax expense are administrative expenses. S15,000 of the notes payable is due for payment next year 6. 7.Explanation / Answer
Since, we are provided with the Adjusted information. We will use the adjusted amounts to solve the problem. As, Adjusted figures are more reliable than unadjusted figures.
Current Ratio: Current Assets ÷ Current Liabilities
Current Assets: Accounts Receivable + Cash + Prepaid Insurance + Inventory
= 10,880 + 6,000 + 4,500 + 38,100
= 59,480
Current Liabilities: Accounts Payable + Notes Payable + Sales Commissions Payable + Property Taxes Payable
= 23,215 + 15000* + 6,000 + 3,500
= 47,715 * As only 15,000 is due for Next year.
Current Ratio = 59,480 ÷ 47,715 = 1.25
Quick Ratio : (Current Assets – Inventories) ÷ Current Liabilities
= (59,480 – 38,100) ÷ 47,715
= 0.45
Working Capital = Current Assets - Current Liabilities
= 59,480 – 47,715
= 11,765
Accounts Receivable Turnover = Net Credit Sales ÷ Average Accounts Receivable
Net Credit Sales = Sales – Sales Returns and Allowances
= 860,000 – 125,000
= 735,000
Assumption: Assuming there is no cash sales during the year and sales returns are from current year sales only.
Average Accounts Receivable = (Opening Accounts Receivable + Closing Accounts Receivable) ÷ 2
= (12,750 + 10,880) ÷ 2
= 11,815
Accounts Receivable Turnover = 735,000 ÷ 11,815
= 62.21
Average Collection Period = (Days × Avg. Amounts of Accounts Receivables) ÷ Net Credit Sales
= (365 × 11,815) ÷ 735,000
= 5.87
Inventory Turnover = Cost of Goods Sold ÷ Average Inventory
Cost of Goods Sold = Opening Inventory + Purchases + Freight Inward – Purchase Discount – Purchase Returns and Allowances – Closing Inventory
= 0 + 630,500 + 5,060 – 7,000 – 3,000 – 38,100
= 587,460
Inventory Turnover = 587,460 ÷ 38,100
= 15.42
Note: Since. Only closing inventory is given in the question, we will not average it.
Days in Inventory = (365 × Closing Inventory) ÷ Cost of Goods Sold
= (365 × 38,100) ÷ 587,460(See Calculation 6)
= 23.67
Debt to Total Assets Ratio = Total Debt ÷ Total Assets
Total Debt = Accounts Payable + Notes Payable + Sales Commission Payable + Property Taxes Payable
= 23,215 + 45,000 + 6,000 + 3,500
= 77,715
Total Assets = Accounts Receivable + Cash + Inventory + Prepaid Insurance + Delivery Equipment (Net of Accumulated Depreciation) + Store Equipment (Net of Accumulated Depreciation)
= 10,880 + 6,000 + 38,100 + 4,500 + 37,320 + 83,200
= 180,000
Debt to Total Assets Ratio = 77,715 ÷ 180,000
= .43
Gross Profit Ratio = (Total Sales – Cost of Goods Sold) ÷ Total Sales
= (735,000 – 587,460) ÷ 735,000
= 20.07 %
Profit Margin Ratio = Net Income ÷ Net Sales
= 33,440 ÷ 735,000
= 4.55 %
Return on Assets Ratio = Net Income ÷ Average Total Assets
= 33,440 ÷ 162,961
= 20.52 %
Assets Turnover Ratio = Net Sales ÷ Average Total Assets
= 735,000 ÷ 162,961
= 4.51
Analysis:
Company can meet its current obligations as Current Ratio is 1.25. Company can also meet its long term obligation as Debt to Total Assets Ratio is 0.43
Company is enjoying Gross profit ratio of 20% and Profit Margin Ratio of 4.55 % which is good. Also Return on Assets is 20%.
Yes, We can lend the company for long term.
Company is good in collecting receivables & maintain inventory as visible from relevant ratios.
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