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1 (a)
Receivables turnover ratio
1 (a)
Explanation of Solution
Receivables turnover ratio: Receivables turnover ratio is mainly used to evaluate the collection process efficiency. It helps the company to know the number of times the accounts receivable is collected in a particular time period. This ratio is determined by dividing credit sales and sales return.
Determine receivables turnover ratio.
Working Notes:
Determine the amount of average accounts receivables.
1 (b)
Inventory turnover ratio
1 (b)
Explanation of Solution
Inventory Turnover Ratio:
This ratio is a financial metric used by a company to quantify the number of times inventory is used or sold during the accounting period.
Determine receivables turnover ratio.
Working Notes:
Determine the amount of average accounts receivables.
1 (c)
Current ratio
1 (c)
Explanation of Solution
Current Ratio:
Current ratio is used to determine the relationship between current assets and current liabilities. Current ratio is determined by dividing current assets and current liabilities. The ideal current ratio is 2:1
Determine current ratio.
Current assets and current liabilities are determined as follows:
1 (d)
Acid-test ratio
1 (d)
Explanation of Solution
Acid-Test Ratio:
This ratio denotes that this ratio is a more rigorous test of solvency than the current ratio. It is determined by dividing quick assets and current liabilities. The acceptable acid-test ratio is 0.90 to 1.00. Use the following formula to determine the acid-test ratio:
Determine acid-test ratio.
Quick assets are determined as follows:
1 (e)
Debt-equity ratio
1 (e)
Explanation of Solution
Debt-equity Ratio:
The debt equity ratio measures the relationship between the capital contributed by creditors and the capital contributed by the stockholders or owners. It indicates the long term solvency position of the company.
Determine debt equity ratio.
Total liabilities and
2)
To compare: Weather on company can have higher return on assets while the other has a higher return on equity
2)
Explanation of Solution
Yes, one company can have higher current ratio because of higher prepaid expenses and Inventory comparing to other current asset. Inventory and prepaid expenses are less liquid and they are excluded in the calculation of acid-test ratio
Acid-test ratio will be always lower than the current ratio for the same company since the current ratio comprises of all current assets, while only cash, current investments and Accounts receivables are included in acid-test ration.
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Chapter 12 Solutions
FINANCIAL ACCOUNTINGLL W/CONNECT >IC<
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Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning