Question

Use the financial data shown below to calculate the following ratios for the current year:

(a) Current ratio.
(b) Acid-test ratio.
(c) Accounts receivable turnover.
(d) Days' sales uncollected.
(e) Inventory turnover.
(f) Days' sales in inventory.

Income statement data
Sales (all on credit)	$650,000
Cost of goods sold	425,000
Income before taxes	78,000
Net income	54,600

	Ending Balances	Beginning Balances
Cash	$19,500	$15,000
Accounts receivable (net)	65,000	60,000
Inventory	71,500	64,500
Plant and equipment (net)	195,000	183,900
Total assets	$351,000	$323,400
Current liabilities	$62,400	$52,700
Long-term notes payable	97,500	100,000

Answer 1

(a) Current ratio = current assets/current liabilities

= (19,500 + 65,000 + 71,500)/62,400

= 2.50

(b) Acid test ratio = (current assets - inventory)/current liabilities

= (156,000 - 71,500)/62,400

= 1.354

(c) Account receivable turnover

= Net credit sales/Average account receivable

= 650,000/[(65,000 + 60,000)/2]

= 10.40

(d) Days sales uncollected = (Account receivable/net sales) x 365

= (65,000/650,000) x 365

= 36.50

(e) Inventory Turnover = Cost of goods sold/average inventory

= 425,000/[(71,500 + 64,500)/2]

= 6.25

(f) Days sales in inventory = 365/inventory turnover ratio

= 365/6.25

= 58.40