Question

C2-Selected information for Smith Company are presented below. (SK3, AR2: 10 marks) Cash Short-term investments Net receivables Inventories Total current liabilities December 31, 2019 100,000 50,000 250,000 200,000 250,000 December 31, 2018 $74,400 45,000 225,000 150,000 225,000 During 2019, net sales were $2,500,000, cost of goods sold was $2,000,000, and net income was $850,000. Required: Compute the following ratios for Smith Company at December 31, 2019: a. Current b. Acid-test. c. Accounts receivable turnover. d. Profit margin. e. Inventory turnover.

Answer 1

a)

Current ratio = Current assets Current liabilities

Current assets = Cash + short term investments + net receivables + inventories

Current assets = 100,000 + 50,000 + 250,000 + 200,000 = 600,000

600,000 Current ratio = 750.000 = 24

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b)

Quick assets Acid - test ratio = current liabilities

Quick assets = Current assets - inventories = 600,000 - 200,000 = 400,000

Acid - test ratio = 400,000 250,000

Acid test ratio = 1.6

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c)

Net sales Accounts receivable turnover = mnover = Average accounts receivable

Accounts receivable turnover = $2,500,000 $250,000 + $225,000

Accounts receivable turnover = 10.53 times per year

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d)

Net income Profit margin= = Sales

Profit margin = $850,000 500 000 X 100

Profit margin = 34%

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e)

Inventory turnover ratio = Cost of goods sold Average inventory

$2,000,000 Inventory turnover ratio - 200.000 + 150,000

Inventory turnover ratio = 11.43 times per year