Question

Use the following financial statements to answer 4 through 9. Income Statement Sales Cost of Goods Sold Gross Profit Operating Expenses Interest Expense income before Taxes Income Taxes Net Income 315500 236100 79400 49200 2200 28000 4200 23800 Balance Sheet Assets: Accounts Receivable Cash Inventory Notes Receivable - ST Plant Assets Prepaid Expenses ST Investments Total Assets 12100 6100 13500 3000 73900 2000 6900 117500 Liabilities & Equity: Accounts Payable Income Taxes Payable Notes Payable - LT Wages Payable Common Stock Retained Earnings Total Liabilities & Equity 11500 2600 30000 3300 35000 35100 117500 Current Ratio Organizations would be most pleased if their Average Collection Periods were A) 60 days B) 45 days C) 30 days D) 15 days Average Collection Period Days Sales in Inventory Debt Ratio Profit Margin

Answer 1

Current asset / Current Liability Answer 1 Current Ratio = Current ratio are the simple measure for estimating whether the business can pay its short term debts. The ideal is ratio 2:1. 12,100 6,100 13,500 3,000 2,000 6,900 43,600 Current Asset Account receivable cash Inventory Notes Receivable-ST Prepaid Expense Investments -ST Total of Current Asset (a) Current Liability Accounts payable Income tax payable Wages payable Total of Current Liability (b) Current Ratio (a/b)(Times) (Notes 1) (Notes 1) Current ratio is 2.51 times for current asset than current laibility it is good for this entity. 11,500 2,600 3,300 17,400 2.51

Answer 2 Organization would be most pleased if their average collection period were: Average collection period are the measure of average number of days it takes to collect an account receivable. So here, entity planning different average collection period for the account receivable on the sales mentioned in question Organization would be most pleased if their average collection period were: a 60 days b 45 days c 30 days d 15 days Equations are: Average account receivable / Average daily credit sales Average collection period = Credit sales / Number of days in a Iyear Average daily credit sales =

If their average collection period are 60 days Sale during the Year (a) (all sales assume to be Number of days in a year (b) assume to be Average daily credit sales (c = a/b) 3,15,500.00 365.00 864.38 51863.014 Average collection period (days) (d) So, Average account receivable will be (c* d) (Note 2) (Note 2) Average collection period multiplied with average daily credit sales are average account receivable If their average collection period are 45 days Average daily credit sales (as above) (a) Average collection period (days) (b) So, Average account receivable will be (a*b) (Note 1) 864.38 45.00 38,897.26 864.38 If their average collection period are 30 days Average daily credit sales (as above) (a) Average collection period (days) (b) So, Average account receivable will be (a*b) (Note 1) 25,931.51

d If their average collection period are 15 days Average daily credit sales (as above) (a) Average collection period (days) (b) So, Average account receivable will be (a*b) (Note 1) 864.38 15 12,965.75 We can conclude that if average collection period giving to customer their average account receivable will be reduce. Answer 3 Average collection period Account receivable (as per question) (a) Average Daily credit sales (As above) (b) Average collection period (a/b) (Days) 12,100.00 864.38 14 Days

Answer 4 Days sales in inventory Days sale in inventory means number of days it took a entity to sell its inventory during the year. Days sales in inventory = 365 Days / Inventory Turnover ratio Inventory Turnover Ratio = Cost of good sold or Sales / Average Inventory Average inventory = Opening stock + Closing stock /2 Here, Not available of opening stock we assume to be taken average inventory as Closing inventory that is (a) Sales (as per question) (b) 13,500 3,15,500 Inventory Turnover Ratio =(c =b/a) 23.37 Times 16 Days Days sales in inventory = ( 365 days/c) So, 16 days will take in this entity to sell its inventory.

Answer 5 Debt Ratio Total Debt / Net Assets Debt Ratio = Total Debt (A) Net Assets (B) Debt Ratio (A/B) 47,400 1,00,100 0.474 Here, Total Debt = Accounts payable Income tax payable Wages payable Note Payable-LT Total Debt =(A) 11,500 2,600 3,300 30,000 47,400 Fixed Asset + (Current asset - Current liability) Net Assets = Fixed Asset : Plant Asset (a) Net of Current Asset (b) Total of Net Assets {(B) = alb } 73,900 26,200 1,00,100

Net of Current Asset : Current Asset Account receivable cash Inventory Notes Receivable-ST Prepaid Expense Investments -ST Total Current Asset (a) 12,100 6,100 13,500 3,000 2,000 6,900 43,600 Current Liability Accounts payable Income tax payable Wages payable Total Current Liability (b) Net of Current Asset :(a-b) 11,500 2,600 3,300 17,400 26,200

Answer 6 Profit Margin/Gross Profit Ratio Gross profit ratio measures percentage of each sale in amount remaining after payment of goods sold. Profit Margin / Gross Profit Ratio = Gross Profit / Sales *100 Gross profit as per question (a) Sales as per question (b) 79400 315500 Profit Margin/Gross Profit Ratio = (a/b)*100 25%