Question

In: Finance

Given: Total current assets (CA), $14,000; accounts receivable (AR), $5,500; total cur- rent liabilities (CL), $9,000;...

Given: Total current assets (CA), $14,000; accounts receivable (AR), $5,500; total cur- rent liabilities (CL), $9,000; inventory (Inv), $3,900; net sales, $36,500; total assets, $32,000; net income (NI), $8,000. Calculate:

a. Current ratio.

b. Acid test.

c. Average day’s collection.

d. Profit margin on sales (round to the nearest hundredth percent).

Expert Solution

(a) Current ratio = Current assets / Current liabilities

Current assets = $14000, Current liabilities = $9000

Current ratio = $14000 / $9000 = 1.55

(b) Acid test ratio = Current assets – Inventories – Prepaid expenses / Current liabilities

Current assets = $14000, Current liabilities = $9000, Inventories = $3900

Acid test ratio = ($14000 - $3900) / $9000

Acid test ratio = $10100 / $9000 = 1.12

(c) For average day's collection, we need to calculate receivables turnover ratio as below:

Receivable turnover ratio = Sales / Accounts receivables

Sales = $36500, Accounts receivables = $5500

Putting these values in the receivable turnover ratio formula, we get,

Receivables turnover ratio = $36500 / $5500 = 6.64

Now, we will calculate Average day's collection as below:

Avearge day's collection = 365 / Accounts receivable turnover ratio

Receivable turnover ratio = 6.64 times ( as computed above)

Putting these values in the Avearge day's collection formula, we get,

Average day's collection = 365 / 6.64 = 54.97 days

(d) Profit margin on sales = Net income / Sales * 100

Net income = $8000, Sales = $36500

Net Profit margin = $8000 / $36500 * 100 = 21.92%

jeff jeffy answered 1 year ago

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