Question

8) Explain how financial statements are used to analyze businesses. The financial statements of Phil's Burgers include the following items: Compute the following ratios for the current year: 2018 2017 Balance Sheet: Cash $ Short-term Investments 16,000 19,000 60,000 78,000 Net Accounts Receivable Merchandise Inventory Prepaid Expenses Total Current Assets Total Current Liabilities Income Statement: Net Credit Sales $ 26,000 28,000 92,000 74,000 6,000 226,000 82,000 17,000 190,000 136,000 $ 476,000 312,000 Cost of Goods Sold

Answer 1

Answer :-

Ratio	Formula/Calculation	Answer
(a) Current Ratio	Current Ratio = Total current assets / Total current liabilities Given, Total current assets = $190,000 Total current liabilities = $136,000 Current ratio = $190,000 / $136,000 = 1.40 (approx.)	1.40
(b)Cash Ratio	Cash Ratio = ( Cash + Short term investment ) / Total current liabilities Given,Cash = $16,000 Short term investment = $19,000 Total Current liabilities = $136,000 Cash Ratio = ( $16,000 + $19,000 )/ $136,000 = 0.26	0.26
(c) Acid test Ratio	Acid Test Ratio = (Cash + Short term investment + Net account receivable ) / Total current liabilities Given,Cash = $16,000 Short term investment = $19,000 Net account receivable = $60,000 Total Current liabilities = $136,000 Acid Test Ratio = ( $16,000 + $19,000 + $60,000) / $136,000 = 0.70	0.70
(d) Inventory turnover	Inventory turnover = Cost of Good sold / Average Inventory Cost of good sold = $312,000 Average Inventory = (2018 Merchandise Inventory + 2017 Merchandise Inventory)/2 Average Inventory = ( $78,000 + $74,000)/2 = $76,000 Inventory turnover = $312,000 / $76,000 = 4.11	4.11
(e)Days' sales in Inventory	Days' sales in Inventory = 365 / Inventory turnover Inventory turnover = 4.11 Days' sales in Inventory = 365 / 4.11= 89 days	89 Days
(f) Days' sales in Receivable	Days' sales in Receivable = 365/Account Receivable Turnover Account Receivable Turnover = Net Credit sales / Average Account Receivable Average Receivable = (2018 Account Receivable + 2017 Account Receivable )/2 Average Receivable = ($60,000 + $92,000)/2 = $76,000 Net Credit sales = $476,000 Account Receivable Turnover = $476,000 / $76,000 = 6.26 Days' sales in Receivable = 365/ 6.26 = 58 days	58 days
(g) Gross Profit Percentage	Gross profit % = ( Net Credit sales - Cost of good sold )/ Net Credit sales Net Credit sales = $476,000 Cost of good sold = $312,000 Gross profit % = ($476,000 - $312,000) / $476,000 = 34.45%	34.45%