Based on the ratios below, which of the two companies is most liquid? Assume that both companies have approached you seeking a six-month (short-term) loan in the amount of 30% of the respective company’s current assets. You have but one loan to give. To which company do you grant the loan? Please discuss each ratio. COMPANY 1 (Data from left to right: 2018, 2019) Accounts receivable turnover =Net Credit Sales/ Average Debtors =6643051 / 58752 =113.07 =6084766 / 71649 =84.92 Average Days to collect= 365 / Accounts receivable turnover =365 / 113.07= 3.22 365 / 84.92= 4.29 Inventory Turnover= COGS / Average Inventory = 3868119 / 954183 =4.05 =3559158 / 752562 =4.73 Average Inventory Period= 365 / Inventory Turnover = 365 / 4.05= 90.12 365 / 4.73 = 77.16 Company 2 (Data years from left to right: 2018, 2019, 2020) Accounts Receivable turnover Ratio = ( Net Credit sales / Average Accounts receivable ) From table A (5/7) 184.15 143.98 129.22 Avg Days to collect receivable Ratio = (365 / Avg Receivable turnover ratio) From table B ( 365 Days/4) 1.98 2.35 2.82 Inventory Turnover ratio = ( Cost of goods sold / Avg Inventory ) From table A ( 4/8) 2.815 2.869 2.830 Average Days to sell the inventories = (Inventory / Cost of sales)365 days From table A (3/4) 365 days 127.20 130.00 126.23

Principles of Accounting Volume 1

19th Edition

ISBN:9781947172685

Author:OpenStax

Publisher:OpenStax

Chapter9: Accounting For Receivables

Section: Chapter Questions

Problem 10EB: Starlight Enterprises has net credit sales for 2019 in the amount of $2,600,325, beginning accounts...

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Based on the ratios below, which of the two companies is most liquid? Assume that both companies have approached you seeking a six-month (short-term) loan in the amount of 30% of the respective company’s current assets. You have but one loan to give. To which company do you grant the loan? Please discuss each ratio.

COMPANY 1
(Data from left to right: 2018, 2019)


Accounts receivable turnover =Net Credit Sales/ Average Debtors	=6643051 / 58752 =113.07	=6084766 / 71649 =84.92
Average Days to collect= 365 / Accounts receivable turnover	=365 / 113.07= 3.22	365 / 84.92= 4.29
Inventory Turnover= COGS / Average Inventory	= 3868119 / 954183 =4.05	=3559158 / 752562 =4.73
Average Inventory Period= 365 / Inventory Turnover	= 365 / 4.05= 90.12	365 / 4.73 = 77.16

Company 2
(Data years from left to right: 2018, 2019, 2020)

Accounts Receivable turnover Ratio = ( Net Credit sales / Average Accounts receivable ) From table A (5/7)	184.15	143.98	129.22
Avg Days to collect receivable Ratio = (365 / Avg Receivable turnover ratio) From table B ( 365 Days/4)	1.98	2.35	2.82
Inventory Turnover ratio = ( Cost of goods sold / Avg Inventory ) From table A ( 4/8)	2.815	2.869	2.830
Average Days to sell the inventories = (Inventory / Cost of sales)365 days From table A (3/4) 365 days	127.20	130.00	126.23

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