Chapter 8, Problem 8.7AP

To determine

Current ratio

The financial ratio which evaluates the ability of a company to pay off the debt obligations which mature within one year, or within completion of the operating cycle, is referred to as current ratio. This ratio assesses the liquidity of a company.

Formula of current ratio:

$\boxed{\text{Current ratio = }\frac{\text{Current assets}}{\text{Current liabilities}}}$

Accounts receivable turnover:

Accounts receivable turnover is a liquidity measure of accounts receivable in times, which is calculated by dividing the net credit sales by the average amount of net accounts receivables. In other words, it indicates the number of times the average amount of net accounts receivables collected during a particular period.

Formula of current ratio:

$\boxed{\text{Accounts}\text{receivable}\text{turnover}=\frac{\text{Net credit sales}}{\text{Average}\text{net}\text{account}\text{receivable}}}$

Average collection period:

Average collection period indicates the number of days taken by a business, to collect its outstanding amount of accounts receivable on an average.

Formula of average collection period:

$\boxed{\text{Average collection period =}\frac{\text{Number of days in a year}}{\text{Accounts receivable turnover}}}$

To indicate: whether each transaction will increase (I), decrease (D), or have no effect (NE) for the given ratios.