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Exercise 13-8 Analyzing and interpreting liquidity LO P3

[The following information applies to the questions displayed below.]

Simon Company’s year-end balance sheets follow.

At December 31	Current Yr	1 Yr Ago	2 Yrs Ago
Assets
Cash	29,829	34,868	35,252
Accounts receivable, net	89,500	62,300	51,100
Merchandise inventory	113,000	84,000	56,000
Prepaid expenses	9,606	9,153	3,917
Plant assets, net	253,731	236,977	202,831
Total assets	495,666	427,298	349,100
Liabilities and Equity
Accounts payable	125,889	73,658	47,003
Long-term notes payable secured by mortgages on plant assets	95,049	100,244	78,694
Common stock, $10 par value	162,500	162,500	162,500
Retained earnings	112,228	90,896	60,903
Total liabilities and equity	495,666	427,298	349,100

The company’s income statements for the Current Year and 1 Year Ago, follow. Assume that all sales are on credit:

For Year Ended December 31	Current Yr		1 Yr Ago
Sales		644,366		508,485
Cost of goods sold	393,063		330,515
Other operating expenses	199,753		128,647
Interest expense	10,954		11,695
Income tax expense	8,377		7,627
Total costs and expenses		612,147		478,484
Net income		32,219		30,001
Earnings per share		1.98		1.85

Exercise 13-8 Part 2

(2-a) Compute accounts receivable turnover.
(2-b) For each ratio, determine if it improved or worsened in the current year.
(3-a) Compute inventory turnover.
(3-b) For each ratio, determine if it improved or worsened in the current year.

** There is no incomplete sentences

Answer 1

Answer-2-a)- Accounts receivable turnover ratio = Net credit sales/Average accounts receivable

Current Yr.= $644366/($62300+$89500)/2

= $644366/$75900

= 8.49 times

1 Yr. Ago = $508485/($51100+$62300)/2

= $508485/$56700

= 8.97 times

2-b)- Accounts receivable turnover ratio is worsened in the current year.

Answer- 3-a)- Inventory turnover ratio = Cost of goods sold/Average inventory

Current Yr. = $393063/($84000+$113000)/2

= $393063/$98500

= 3.99 times

1 Yr. Ago = $330515/($56000+$84000)/2

= $330515/$70000

= 4.72 times

3-b)-Inventory turnover ratio is worsened in the current year.