Question

Problem 3-16 Liquidity and Asset Management Ratios (LG 3-1, LG 3-2) Mandesa, Inc. has current liabilities of $9,200,000, current ratio of 2.0 times, inventory turnover of 12 times, average collection period of 42 days, and credit sales of $65,200,000. Calculate the value of cash and marketable securities. (Use 365 days a year. Do not round your intermediate calculations. Round your final answer to the nearest dollar amount.) Cash and marketable securities

Answer 1

Solution :-

Given,

Current Liabilities = $9,200,000

Current Ratio = 2 Times

Current Assets/Current Liabilities = 2

Current Assets/$9,200,000 = 2

Current Assets = 2*$9,200,000

                           = $18,400,000                                            ………………(1)

Average collection period = 365 days in a year divided by the accounts receivable turnover ratio.

42                                          = 365/Accounts Receivable Turnover

Accounts Receivable Turnover Ratio =365/42

Where,

Accounts Receivable Turnover Ratio = Net Credit Sales /Average Accounts Receivable
365/42                                                        = $65,200,000/ Average Accounts Receivable

Average Accounts Receivable = $65,200,000*(42/365)

Accounts Receivable                 = $7,502,466.58                       ……………..(2)    {note 1}

Net inventory Turnover Ratio = COGS/Average Inventory

12                                                     = $65,200,000/Average Inventory                 {note 2}

Average Inventory                     = $65,200,000/12

Inventory                                     = $5,433,333.33                      ……………….(3) {note 3}               

Now,

Current Assets = Accounts Receivable + Inventory + Cash and Marketable Securities

$18,400,000 = $7,502,466.58 + $5,433,333.33 + Cash and Marketable Securities

Cash and Marketable Securities = 5,464,200                   (approx.)

Note.

Because of lack of information following Is assumed

1. Opening and Closing Balance of Accounts Receivable is Equal.
2. COGS and Sales value are equal and there is no cash sales.
3. Opening and Closing Balance of Inventory is Equal.