Question

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Page 2 of s Graded problem Chapter 14- Financial Accounting Comparative financial statements for ABC, a merchandising company for the calendar year ended 12/31/18 are below. The Company did not issue any new common stock during the year. A total of 800,000 shares of common stock were outstanding. The interest rate on the bond payable was 12%, the income tax rate was 40% and the dividend per share of common stock was $.40. The market value of the company's common stock at the end of the year was $18. All of the Company's sales are on account. Required: Using the information above and below as needed, calculate, or comment as appropriate, regarding the following ratios for the CURRENT YEAR: 1. Working Capital 2. Current Ratio 3. Acid-Test (Quick) Ratio 4. Briefly comment (one or two sentences) about the collective information provided by the ratios 1-3. 5. Accounts Receivable Turnover 6. Average Collection Period (Days Sales Outstanding in Receivables) 7. Briefly comment (one or two sentences) about the information in 5 & 6. If credit terms are 2/10;n 30, would you be concerned? Why or why not?

Answer 1

1)	Working capital = Current asset / Current liabilities
	Current assets	25,080
	Current liabilities	10,400
	Working capital	2.41
	Working capital ratio	2.4 : 1
2)	Current ratio = Current asset / Current liabilities
	Current ratio is same as Working capital ratio computed in serial # 1 above
3)	Acid test (Quick) ratio = (Total current assets - Inventory- Prepaid expenses) / Total current liabilities
	Cash	1,280
	Accounts receivable Net	12,300
		13,580
	Total current liabilities	10,400
	Acid test (Quick)	1.31
	Acid test (Quick) ratio	1.31 : 1
4)	- Working capital ration in the range of 2 is considered as to represent good short term liquidity
	- Current ration represents companies healthy situation to be able to convert all it assets to pay
	of the liabilities in one year, the ration represents that for every $ 1 liability the company has $ 2.4 to pay
	- Acid / quick ratio as it's name suggest it measures the company's strenght to pay the current liabilities
	through it's short term assets
5)	Accounts receivable turnover = Accounts receivable / Turnover
	Accounts receivable	12,300
	Turnover	79,000
	Account receivable turnover	0.16
6)	Average collection period = (Accounts receivable*no of days in a year)/Total sales
	Accounts receivable Net	12300
	No of days in a year	365
	Total sales	79000
	Average collection period	56.83