Question

Question 3

Dunder Mifflin had the following balances in selected accounts at the end of 2015 and 2016.

	2015	2016
Cash	$58,000	$45,000
Short-term investments	46,000	39,000
Accounts receivable	54,000	61,000
Allowance for uncollectible accounts	3,500	5,000
Inventory	78,000	98,000
Accounts payable	91,000	102,000
Wages payable	17,000	25,000
Income tax payable	4,500	6,500
Note payable (due 2022)	100,000	100,000
Sales	415,000	525,000
Cost of goods sold	225,000	304,000

The accounts receivable at the end of 2014 were $50,000 and the allowance for uncollectible accounts was $2,500.

1.    Calculate the acid test ratio for 2015 and 2016 for Dunder Mifflin.
2.    Calculate the days sales in receivables for 2015 and 2016 for Dunder Mifflin.
3.    Determine whether the acid-test ratio improved or deteriorated from 2015 to 2016.
4.    Determine whether the collection period increased or decreased from 2015 to 2016.

Answer 1

1.

Current liabilities for 2015 = Accounts payable + Wages payable + Income tax payable

= 91,000 + 17,000 + 4,500

= $112,500

Acid test ratio for 2015 = (Cash + Short-term investments + Accounts receivable - Allowance for uncollectible accounts)/Current liabilities

= (58,000 + 46,000 + 54,000 - 3,500)/112,500

= 154,500/112,500

= 1.37

Current liabilities for 2016 = Accounts payable + Wages payable + Income tax payable

= 102,000 + 25,000 + 6,500

= $133,500

Acid test ratio for 2016 = (Cash + Short-term investments + Accounts receivable - Allowance for uncollectible accounts)/Current liabilities

= (45,000 + 39,000 + 61,000 - 5,000)/133,500

= 140,000/133,500

= 1.05

Acid-test ratio deteriorated from 2015 to 2016.

2.

For 2015

Beginning accounts receivable, net = Accounts receivable - Allowance for uncollectible accounts

= 50,000 - 2,500

= $47,500

Ending accounts receivable, net = Accounts receivable - Allowance for uncollectible accounts

= 54,000 - 3,500

= $50,500

Average accounts receivable = (Beginning accounts receivable, net + Ending accounts receivable, net)/2

= (47,500 + 50,500)/2

= $49,000

Days sales in receivables = 365 x Average accounts receivable/Sales

= 365 x 49,000/415,000

= 43 days (rounded to whole day)

For 2016

Beginning accounts receivable, net = Accounts receivable - Allowance for uncollectible accounts

= 54,000 - 3,500

= $50,500

Ending accounts receivable, net = Accounts receivable - Allowance for uncollectible accounts

= 61,000 - 5,000

= $56,000

Average accounts receivable = (Beginning accounts receivable, net + Ending accounts receivable, net)/2

= (50,500 + 56,000)/2

= $53,250

Days sales in receivables = 365 x Average accounts receivable/Sales

= 365 x 53,250/525,000

= 37 days (rounded to whole day)

Collection period decreased from 2015 to 2016.