Question

Saturn Ltd. Has sales of $ 800,000, a net income of $ 60,000 and the following balance sheet:  

Assets	Amount ($)	Liabilities and Owners’ Equity	Amount ($)
Cash	$ 10,000	Accounts Payable	$ 30,000
Accounts Receivable	$ 50,000	Other Current Liabilities	$ 20,000
Inventories	$ 150,000	Long-term Debt	$50,000
Net Fixed Assets	$ 90,000	Common Equity	$ 200,000
Total Assets	$ 300,000	Total Liabilities and Owners’ Equity	$ 300,000

Additional Information:

·Cost of goods sold is $ 600,000. Of which 70% was purchased during the year.

•   The company has no preferred stock.

Industry Information:

Ratios	Industry Average
Current Ratio	3.0
Quick Ratio	1.5
Inventory Turnover	9.2
Average Age of Inventory	75
Average Collection Period	20
Average Payment Period	30

Instructions:

a)      Calculate the Quick ratio of Saturn Ltd.

b)     Calculate the Average Collection Period of Saturn Ltd.

c) The company provides a credit term of 30 days to all its customers. On the basis of the company’s credit policy and the industry average comment on Saturn’s management of accounts receivables.

Answer 1

a. Quick ratio=(cash+accounts receivables)/(accounts payables+other current liabilities)=(10,000+50,000)/(30,000+20,000)=60,000/50,000=1.20

b. Average collection period=(accounts receivables/sales)*365=(50,000/800,000)*365=22.81 days

c. If their credit term is 30 days, it is taking 10 more days (30-20 days) to collect the recievbles when compared to the industry.