Question

In: Accounting

Company A Company B: Net sales $675,000 $560,000 Cost of goods sold 504,000 480,000 Cash 45,900...

Company A Company B: Net sales $675,000 $560,000 Cost of goods sold 504,000 480,000 Cash 45,900 18,000 Accounts receivable (net) 67,500 63,000 Inventory 75,600 144,000

Current liabilities 84,000 80,000

Assume that the year-end balances shown for accounts receivable and for inventory also represent the average balances of these items throughout the year. Each company offers 30-day credit terms to its customers.

REQUIRED: 1. For each of the two companies, compute the following: a) current ratio b) quick ratio c) merchandise turnover d) accounts receivable turnover e) days' sales uncollected

2. With reference to answer to requirement, identify to which company you would prefer to sell $30,000 of merchandise on 30-day credit terms. Why?

I dont understand how to do the second part. I got all the numbers for the first section. Please explain number 2. Thank you!

Solutions

Expert Solution

Particular Company A Company A Revised Company B Company B Revised
Net Sales                     675,000.00                     705,000.00                     560,000.00                     590,000.00
COGS                     504,000.00                     526,401.00                     480,000.00                     505,713.00
Gross Profit                     171,000.00                     178,599.00                       80,000.00                       84,287.00
Cash                       45,900.00                       45,900.00                       18,000.00                       18,000.00
Account Receivable (NET)                       67,500.00                       97,500.00                       63,000.00                       93,000.00
Inventory                       75,600.00                       53,199.00                     144,000.00                     118,287.00
Total Current Assets                     189,000.00                     196,599.00                     225,000.00                     229,287.00
Quick Assets                     121,500.00                       99,099.00                     162,000.00                     136,287.00
Current Liabilities                       84,000.00                       84,000.00                       80,000.00                       84,000.00
GP Ratio 25.33% 25.33% 14.29% 14.29%
Stock Turnover Ratio                                  6.67                                  9.89                                  3.33                                  4.28
Current Ratio                                  2.25                                  2.34                                  2.81                                  2.73
Quick Ratio                                  1.45                                  1.18                                  2.03                                  1.62
Account receivables Ratio                               10.00                                  7.23                                  8.89                                  6.34
Average Per Day sales                         1,849.32                         1,931.51                         1,534.25                         1,616.44
Days Sales uncollected                               36.50                               50.48                               41.06                               57.53

In the above details I have calculated all the ratios as mentioned with original data as well as with addition in turnover of $30000, addition in Accounts receivable $30000 which is the question. by marinating same Gross profit ration i have reduced the inventory and increase the cost of goods sold and recalculate all the ratios again.

And from those revised ratio i have observe that in company A all ratios except Current assets ratios ( of which slandered mark is 2) has been improved. Current ratio which is earlier 2.25 has been deteriorated to 2.34.

where as in company B on giving effect to condition given in question all ratios have been improved including current asset ratio also.

Hence since all other scenario has given same effect which is improvement in ratios except in current ratio. By considering current ratio i will give my suggestion to Company B to increase its sale by $30000/- with credit period of 30 Days.

ekkarill92 answered 2 years ago
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