Question

Southern Products reported the following amounts in its 2019 financial statements. The 2018 amounts are given for comparison.

2019 2018

Current assets:
Cash		$10,000		$10,000
Short-term investments		10,000		6,500
Accounts receivable	$85,000		$75,100
Less: Allowance for uncollectibles	(6,000)	79,000	(4,000)	71,100
Inventory		193,000		194,000
Prepaid insurance		2,000		2,000
Total current assets		294,000		283,600
Total current liabilities		100,000		107,000
Net sales (all on account)		1,050,700		735,000

Requirement 1. Compute Southern​'s quick​ (acid-test) ratio at the end of 2019. Round to two decimal places. How does the quick ratio compare with the industry average of​ 0.92? Begin by selecting the​ formula, then enter the amounts and compute the quick​ (acid-test) ratio. ​(Abbreviation used:​ Cash* = Cash and cash equivalents. Round the quick​ (acid-test) ratio to two decimal​ places.)

____________________ / ____________________ = Quick (acid-test) ratio

____________________ / ____________________ = ____________________

How does the quick​ (acid-test) ratio compare to the industry average of​ 0.92?

Southern's position is ____________________ compared to the industry average of 0.92.

Requirement 2. Compare​ days' sales outstanding for 2019 with the​ company's credit terms of net 30 days.

Begin by selecting the​ formula, then enter the amounts to calculate the​ days' sales outstanding. ​(Round interim calculations to two decimal​ places, XX.XX and the​ days' sales outstanding​ (DSO) up to the next whole​ day.)

____________________ / ____________________ = Days' sales outstanding

____________________ / ____________________ = ____________________ days

Southern's days' sales outstanding is ____________________ the credit terms of net 30.

Answer 1

Answer a.

Quick (acid-test) ratio = (Cash + Short-term investments + Net current receivable) / Total current liabilities
Quick (acid-test) ratio = ($10,000 + $10,000 + $79,000) / $100,000
Quick (acid-test) ratio = $99,000 / $100,000
Quick (acid-test) ratio = 0.99 times

Southern's position is favorable compared to the industry average of 0.92.

Answer b.

Average accounts receivable = (Ending accounts receivable + Beginning accounts receivable) / 2
Average accounts receivable = ($79,000 + $71,100) / 2
Average accounts receivable = $75,050

Accounts receivable turnover = Net sales / Average accounts receivable
Accounts receivable turnover = $1,050,700 / $75,050
Accounts receivable turnover = 14.00 times

Days’ sales outstanding = 365 days / Accounts receivable turnover
Days’ sales outstanding = 365 / 14
Days’ sales outstanding = 26 days

Southern's days' sales outstanding is better than the credit terms of net 30.