Question

7) 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.

Answer 1

Ans. A 1	Current assets:	Amount	Current liabilities:	Amount
	Cash	$150	Accounts payable	$275
	Accounts receivables	$175	Salaries payable	$25
	Short term investments	$300	Interest payable	$100
	Prepaid expenses	$75
	Total current assets (a)	$700	Total current liabilities (a)	$400
	Current ratio   =   Total current assets / Total current liabilities
	$700 / $400
	1.75 : 1
Ans. A 2	Acid test ratio   =   (Total current assets - Prepaid expenses) / Total current liabilities
	($700 - $75) / $400
	$625 / $400
	1.56 : 1
Ans. A 3	Days sales ratio = Average receivables / Total revenue * Number of days in year
	$200 / $2,500 * 365
	29.2	days
	*Average receivable = (Beginning receivables + Ending receivables) / 2
	($225 + $175) / 2
	$200
Ans. B	Current ratio = Worened
	Acid test ratio = Improved
	Days sales ratio = Improved
	*Higher current and quick ratios are better for company.
	*Lower days sales ratio is favorable as it means that the company is taking
	less time to collect it's receivables.