Question

Gamma Company and Delta Company have compiled the following data as of the end of the current fiscal year:

	Gamma	Delta
Cash	$65,700	$302,300
Temporary investments	27,700	125,000
Accounts receivable	2,500	87,000
Inventory	52,400	127,500
Accounts payable	4,500	265,000
Operating expenses	153,000	625,000

 

Depreciation (one of the operating expenses) for Gamma was $35,000, and for Delta was $65,000.

1. Calculate days' cash on hand for Gamma Company and for Delta Company. Round your answer to one decimal place.

Gamma Company	days
Delta Company	days

2. Which company has the better liquidity position based on your calculation?

Answer 1

Req (1) Calculation of Day's Cash on hand for Gamma Company

Day's Cash on hand for Gamma Company = Cash + Temporary Investment / operating expenses - Depreciation  *  Days in a Year

=65,700 + 27,700 / 1,53,000 - 35,000 * 365

=288.9 Days

Req(1) Calculation of Day's Cash on hand for Delta Company

Day's Cash on hand for Gamma Company = Cash + Temporary Investment / Operating Expenses - Depreciation * Days in a Year

=3,02,300 + 1,25,000 / 6,25,000 - 65,000 * 365

=278.5 Days

Req(2) Gamma has a better liquidity position than delta since its day's  cash on hand is greater

 

 

Req (1) Day's Cash on hand for Gamma Company = 288.9 Days

Req (1) Day's Cash on hand for Delta Company = 278.5 Days

Req (2) Gamma has a better liquidity position than Delta Since its days cash on hand is greater.