Question

In: Accounting

The following information is from Carter Corp.’s year-end financial statements.: Cash $150 Accounts Receivable $175 Short-Term...

The following information is from Carter Corp.’s year-end financial statements.:

Cash $150
Accounts Receivable $175
Short-Term Investments $300
Prepaid Expenses $75
Land $1,000
Equipment $950
Accumulated Depreciation $625
Accounts Payable $275
Salaries Payable $25
Interest Payable $100
Long-Term Notes Payable $300
Long-Term Loans Payable $400
Total Revenues $2,500

a) Calculate Carter’s current ratio, quick (acid test) ratio, and days’ sales ratio for the year. (Last year Carter’s accounts receivables were $225.)

b) Last year, Carter’s current ratio was 2, Carter’s quick ratio was 1.4, and Carter’s days’ sales ratio was 31 days. Comment on whether these ratios have improved or worsened this year.

Solutions

Expert Solution

Current ratio= Current assets/Current liabilities

=$700/$400

=1.75

current assets=Cash+Accounts Receivable+Prepaid Expenses+Short Term Investments

=$150+$175+$75+$300

=$700

current  liabilities= Accounts Payable+Salaries Payable+Interest Payable

=$275+$25+$100

=$400

Quick (acid test) ratio= (current assets-prepaid expenses-inventory)/current liabilities

=$700-$75/$400

=1.5625

Days’ sales ratio=(average accounts receivables/total credit sales)*number of days

=($200/$2500)*360 days(assuming 360 days in a year)

=28.8 days

average accounts receivables=$175+$225/2

=$200

total revenue=$2,500

Comments

Current ratio shows the ability of the company to pay its short term obligations from current assets on time.last year current ratio was 2 and this year it is 1.75. it has worsened as compared to the previous year which indicates that the company's ability to meet its short term obligation has decreased in comparison to the previous year.

Quick ratio shows the ability of the compant to pay its short term obligations from its liquid asset.last year quick ratio was 1.4 and this year it is 1.5625. it has improved as compared to the previous year which indicates that the company's ability to meet its short term obligation from liquid assets has improved in comparison to the previous year.

Days’ sales ratio measures the number of days that a company takes to convert its sales into cash.last year days’ sales ratio was 31 days and this year it is 28.8 days.it has improved as compared to the previous year which indicates that the company's ability to convert it's sale into payment have been improved from 31 days to 28.8 days.   

ekkarill92 answered 2 years ago
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