Question

Question 1 Shown below are selected financial data for AB and XY Limited at the end of the current year AB Ltd XY Ltd Net credit sales $675,000 $560,000 Cost of goods sold 504,000 480,000 Cash 51,000 20,000 Accounts receivable 75,000 70,000 Inventory 84,000 160,000 Current liabilities 105,000 100,000 Required: a) For each of the two companies, compute the following 1. Working capital 2. Current ratio 3. Quick ratio 4. Inventory turnover ratio and average number of days required to turn over inventory 5. Accounts receivable ratio and average accounts receivable collection period. b) From the viewpoint of a short-term creditor, comment on the quality of each company's working capital. To which company would you prefer to sell $20.000 in goods on a 30-day open account?

Answer 1

for AB Ltd

current assets = $51000 + $75000 + $84000 = $210000

current liabilities = $105000

for XY Ltd

current assets = $20000 + $70000 + $160000 = $250000

current liabilities = $100000

(1)

Working capital = current assets- current liabilities

for AB Ltd,

working capital = $210000 - $105000 = $105000

for XY Ltd,

working capital = $250000 - $100000 = $150000

(2)

current ratio = current assets/current liabilities

for AB Ltd,

current ratio = $210000/$105000 = 2 times

for XY Ltd,

current ratio = $250000/$100000 = 2.5 times

(3)

quick ratio = (current assets - inventory)/current liabilities

for AB Ltd,

quick ratio = ($210000 - $84000)/$105000 = 1.2 times

for XY Ltd,

quick ratio = ($250000 - $160000)/$100000 = 0.9 times

(4)

inventory turnover ratio = cost of goods sold/average inventory

for AB Ltd,

inventory turnover ratio = $504000/84000 = 6 times

average days to sell = 365/6 = 60.83 days

for XY Ltd,

inventory turnover ratio = $480000/$160000 = 3 times

average days to sell = 365/3 = 121.67 days