Question

Profitability Ratios Bryce Company manufactures pet supplies. However, Bryce's electronic accounting system recently crashed and, unfortunately, only a partial recovery of the company's year-end accounting records (which included several profitability ratios) was possible. As a result, Bryce's controller, a bright young CMA named Jeanette, must compute various lost financial account balances using the recovered information listed below. Long-term liabilities $1,400,000 Ending inventory is the same as beginning inventory. Gross margin $2,700,000 Net sales $7,400,000 Accounts receivable turnover 40 Ending accounts receivable is the same as beginning accounts receivable. Total liabilities $1,800,000 Current ratio 4 Cash $540,000 Quick ratio 3.5 Inventory turnover in days 3.65 Required: Assume 365 days per year.

1. Calculate current liabilities. $

2. Calculate current assets. $

3. Calculate average accounts receivable. Round your answer to the nearest whole dollar, if required. $

4. Calculate marketable securities. Round your answer to the nearest whole dollar, if required. $

5. Calculate average inventory. $

Answer 1

As given in Question:

Long term Liabilities = $1,400,000

Total Liabilities = $1,800,000

Net Sales = $7,400,000

Gross Margin = $2,700,000

Cash Balance = $5,40,000

Account Receivable Turnover = 40

Current Ratio = 4

Quick Ratio = 3.5

Inventory Turnover In Days = 3.65

Ending Inventory = Beginning Inventory

Ending Accounts Receivable = Beginning Accounts Receivable

1. Calculation of Current Liabilities

Current Liability = Total Liabilities - Long Term Liabilities

= $1,800,000 - $1,400,000

= $400,000

2. Calculation of Current Assets

Current Ratio = Current Assets / Current Liabilities

Therefore, Current Assets = Current Ratio * Current Liabilities

= 4 * $400,000

= $1,600,000

3. Calculation of Average Accounts Receivables

Accounts Receivable Turnover Ratio = Net Sales / Average Account Receivable

Therefore, Average Accounts Receivable = Net Sales / Accounts Receivable Turnover Ratio

= $7,400,000 / 40

= $185,000

4. Calculation of Marketable Securities

Quick Ratio = Quick Assets / Current Liabilities

Where,

Quick Assets =  Cash + Accounts Receivable + marketable Securities

= $540,000 + $185,000 + Marketable Securities

= $725,000 + Marketable Securities

Now putting figures into formula,

3.5 = ($725,000 + Marketable Securities) / $400,000

$1,400,000 = $725,000 + Marketable Securities

Hence,

Marketable Securities = $1,400,000 - $725,000

= $675,000

5. Calculate Average Inventory

-As we Know,

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Where,

Cost of Goods sold = Net Sales - Gross Margin

= $7,400,000 - $2,700,000

= $4,700,000

Inventory turnover Ratio = 365 Days / Inventory Turnover in Days

= 365 / 3.65

= 100

Now subsituting figures in the formula,

100 = $4,700,000 / Average Inventory

Average Inventory = $4,700,000 / 100

= $47,000