Question

The balance sheet for AG Company is shown below.

AG Company

Balance Sheet 2016

Assets		Liabilities and Equity
Cash……………………	$     60,000	Accounts payable……………..	$   220,000
Accounts receivable…...	240,000	Accrued taxes…………………	30,000
Inventory………………	350,000	Bonds payable (long-term)……………………	150,000
Plant and equipment…...	410,000	Common stock………………..	80,000
		Paid-in capital…………………	200,000
		Retained earnings……………..	380,000
Total assets………...	$1,060,000	Total liabilities and equity…	$1,060,000

The Net Sales is 900,000, and Cost of Goods Sold is 400,000 for the year 2016, and the Beginning inventory 200,000, and Beginning Account Receivable is150,000.

Required:

Compute the following ratios with explanation (give your comments on each ratio):

1. Current ratio.

2. Quick ratio(Acid-test ratio).

3. Inventory Turnover in Days

4. Accounts Receivable Turnover in days

     

5. Operating     Cycle  

Answer 1

Answer:

i) Calculation of Current Ratio:

Current Ratio =Current Assets / Current Liabilities

= $650,000/$250,000

= 2.60

Notes:

Current Assets = Cash + Accounts Receivable+Inventory

= $60,000 + $240,000 + $350,000

= $650,000

Current Liabilities = Accounts Payable + Accrued Taxes  

= $220,000 +$ 30,000

= $250,000

ii) Calculation Of Acid Test Ratio

Acid Test Ratio = Quick Assets / Current Liabilities

= $300,000/ $250,000

= 1.20

Notes:

Quick Assets = Current assets - Inventory

= $650,000- $350,000

= $300,000

iii) calculation of Inventory turnover in days

Inventory Turnover ratio(in days) = (Average Inventory/ Cost of goods sold) x Inventory Turnover ratio

= ($275,000/$400,000) x 1.45

= 0.996

Notes:

Inventory Turnover ratio = Cost of goods sold / Average Inventory

= $400,000 / $275000

= 1.45

Average Inventory = (Opening Inventory + Closing Inventory)/2

= ($200,000+$350,000) /2

= $275,000

(iv) Calculation of Accounts Receivable Turnover (In days)

Accounts Receivable Turnover (In days) = 365/Receivable Turnover ratio

= 365/ 4.62

= 79

Notes:

Receivable Turnover Ratio = Credit sales / Average Receivable

= $900,000 / ($150,000 +$ 240,000)/2

= 4.62

v) Calculation of Operating Cycle = 79 + 0.996

= 79.996