Q # 1: (Marks: 10) ABC Corporation’s balance sheet at December 31, 2009,shows th
ID: 2662487 • Letter: Q
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Q # 1: (Marks: 10) ABC Corporation’s balance sheet at December 31, 2009,shows the following: Current assets Cash Rs.4,000 Marketable securities 8,000 Accounts receivables 100,000 Inventories 120,000 Prepaid expenses 1,000 Total current assets Rs.233,000 Current liabilities Notes payable Rs.5,000 Accounts payable 150,000 Accrued expenses 20,000 Income taxes payable 1,000 Total current liabilities Rs.176,000 Long term liabilities Rs.340,000 Determine the following: 1. Net workingcapital 2. Currentratio 3. Quickratio Does ABC Corporation havegood or poor liquidity if industry average for current ratio is1.29 and quick ratio is1.07?Q # 2: (Marks: 10) The XYZ Company reports the following data relative toaccounts receivables: 2009 2008 Average accounts receivables Rs. 400,000 Rs. 416,000 Net credit sales Rs.2,600,000 Rs.3,100,000 The term of sales is net 30 days. 1. Compute the accountsreceivables turnover and the collection period for bothyears 2. Evaluate theresults Q # 1: (Marks: 10) ABC Corporation’s balance sheet at December 31, 2009,shows the following: Current assets Cash Rs.4,000 Marketable securities 8,000 Accounts receivables 100,000 Inventories 120,000 Prepaid expenses 1,000 Total current assets Rs.233,000 Current liabilities Notes payable Rs.5,000 Accounts payable 150,000 Accrued expenses 20,000 Income taxes payable 1,000 Total current liabilities Rs.176,000 Long term liabilities Rs.340,000 Determine the following: 1. Net workingcapital 2. Currentratio 3. Quickratio Does ABC Corporation havegood or poor liquidity if industry average for current ratio is1.29 and quick ratio is1.07?
Q # 2: (Marks: 10) The XYZ Company reports the following data relative toaccounts receivables: 2009 2008 Average accounts receivables Rs. 400,000 Rs. 416,000 Net credit sales Rs.2,600,000 Rs.3,100,000 The term of sales is net 30 days. 1. Compute the accountsreceivables turnover and the collection period for bothyears 2. Evaluate theresults
Explanation / Answer
1) Net working capital: Ameasure of both company’s efficiency and its short-temfinancial health. It is calculated as
Net working capital = Total current assets – Total currentliabilities
Nowsubstituting the values in the above formula, we get
Net working capital = 233,000 – 176,000
= 57,000
2) Current ratio: Anindication of a company’s ability to meet its short-termobligations. It is calculated as
Current ratio = Currentassets
Current liabilities
= 233000/176000 =1.324
3) Quick Ratio: A measureof company’s liquidity and ability to meet its obligations.It is calculated as
Quick ratio = Current assets – Inventories
Currentliabilities
= 233000 – 120000
176000
= 0.642
Ø The higher the current ratio the more assurancethat current liabilities can be paid. If the ratio is greater than“1” it indicates good short-term financial standing ofthe company. A ratio of less than “1” indicates thatthe company is unable to meet its short-term obligations. Hence,the ratio of 1.29 indicates that the industry is performing well inmeeting its short-term obligations.
Ø A common rule of thumb is that companies withquick ratio greater than “1” are sufficiently able tomeet their short-term obligations. The low quick ratio indicatethat the company is over-leveraged, struggling to maintain or growsales, paying bills too quickly or collecting bills too slowly.Hence, the ratio of 1.07 indicate that the industry is quicklyconverting its receivables into cash and easily able to cover itsfinancial obligations.
Ø Accounts Receivable turnover: It is anactivity ratio, measuring how efficiently a firm uses its assets.It is calculated as
AccountsReceivable turnover= Net creditsales
Averageaccounts receivables
For the year 2008, ART = 3100000/416000 = 7.452
For the year 2009, ART = 2600000/400000 = 6.5
Collection period = 365/Accounts Receivables turnover
For year 2008,collection period = 365/7.452 = 49days
For year 2009,collection period = 365/6.5 = 56days
2)
Ø A high Accounts receivables ratio indicate thatthe company operates on a cash-basis or its extension of credit andcollection of receivables is efficient. A low ratio indicates thatthe company should re-assess its credit policies in order to ensurethe timely collection of imparted credit that is not earninginterest for the firm.
Ø The collection period for the year 2008 is 49daysand for 2009 it is 56days. This means that the creditors areextending the no. of days than the given 30days period. A longcollection period may indicate higher risk in collecting theamount, it ties up funds that could be invested elsewhere or usedto make timely payments.
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