Question

Exercise 14-5 Selected comparative financial statement data for Handley Inc. are shown below. 2016 $ HANDLEY INC. Statement of Financial Position (partial) December 31 (in thousands) 2018 2017 Current assets Cash $ 30 $ 92 Held for trading investments 55 Accounts receivable, net 681 590 Inventory 634 530 Prepaid expenses 52 Total current assets $1,441 $1,324 Total current liabilities $ 885 $ 826 60 40 60 494 577 41 29 $1,200 $ 756 Additional information: (in thousands) Allowance for doubtful accounts Net credit sales Cost of goods sold 2018 $ 50 4,210 2,873 2017 $ 45 3,927 2,641 2016 $ 40 3,682 2,350

Answer 1

(1)

Working capital = current assets - current liabilities

for 2018,

working capital = $1441 - $885 = $556

for 2017,

working capital = $1324 - $826 = $498

(2)

current ratio = current assets/current liabilities

for 2018,

current ratio = $1441/$885 = 1.63 times

for 2017,

current ratio = $1324/$826 = 1.60 times

(3)

receivable turnover ratio = net credit sales/average accounts receivable

for 2018,

receivable turnover ratio = $4210/$635.5

= 6.6 times

Where, average accounts receivable = (beginning accounts receivable + ending accounts receivable)/2

= ($681 + $590)/2 = $635.5

for 2017,

receivable turnover ratio = $3927/$542

= 7.2 times

where, average accounts receivable = ($590 + $494)/2 = $542

(4)

Average collection period = 365/accounts receivable turnover ratio

for 2018,

average collection period = 365/6.6

= 55 days

for 2017,

average collection period = 365/7.2

= 51 days

(5)

Inventory turnover ratio = cost of goods sold/average inventory

For 2018,

Inventory turnover ratio= $2873/$582

= 4.9 times

Where,

Average inventory = (beginning inventory + ending inventory)/2

= ($634 + $530)/2 = $582

For 2017,

Inventory turnover ratio= $2641/$553.5

= 4.8 times

Where,

Average inventory = ($530 + $577)/2 = $553.5

(2)

Average sales period = 365/inventory turnover ratio

For 2018,

Average sales period = 365/4.9

= 74 days

For 2017,

Average sales period = 365/4.8

= 76 days