Question

The balance sheet for Stud Clothiers is shown next Sales for the year were $3,460,000, with 75 percent of sales sold on credit. STUD CLOTHIERS Balance sheet 2ex1 Assets Liabilities and Equity Cash $ 54,000 Accounts payable $ 287,000 Accounts receivable 348,000 Accrued taxes 93,000 Inventory 272,000 Bonds payable (long-term) 131,000 Plant and equipment 464,000 Common stock 100,000 Paid-in capital 150,000 Retained earnings 377,000 Total liabilities and Total assets $1,138,000 equity $1,138,000 Compute the following ratios: (Use a 360-day year. Do not round intermediate calculations. Round your answers to 2 decimal places. Input your debt-to-total assets answer as a percent rounded to 2 decimal places.) times times a. Current ratio b. Quick ratio c. Debt-to-total-assets ratio d Asset turnover e. Average collection period times days

Answer 1

Ans : a) Current Ratio

Current Ratio is the liquidity ratio which measures company's ability to pay its short term obligations due within a year.


Current Assets = Accounts Receivable + Cash + Inventory
= $348,000 + $54,000 + $272,000
= $674,000

Current Liabilities = Accounts Payable + Accrued Taxes
= $287,000 + $93,000
= $380,000

Current Ratio = Current Assets / Current Liablities
= $674,000 / $380,000
= 1.7737
   = ~1.77

Current Ratio = 1.77 times

b) Quick Ratio

Quick Ratio also called acid-test ratio measures the ability of the company to pay its current liabilites with most liquid assets i.e. Quick Assets

Quick Assets = Current Assets - Inventory - Prepaid Expenses
= $674,000 - $272,000 - 0
= $402,000

Quick Ratio = Quick Assets / Current Liabilities
= $402,000 / $380,000
= 1.0579
= ~1.06

Quick Ratio = 1.06 times

c) Debt-to-total-assets ratio

Debt-to-total-assets ratio is the leverage ratio which indicates percentage of total assets financed by debt.

Debt-to-total-assets ratio = Total Liabilities / Total Assets
= Long Term Liablities + Current Liabilities / Current Assets + Non-current assets
= $131,000 + $380,000 / $674,000 + $464,000
= $511,000 / $1,138,000
= 0.4490
= ~44.90%

Debt-to-total-assets ratio = 44.90%

d) Asset Turnover Ratio

Asset Turnover Ratio measures the efficiency with which company uses its assets to generate sales.

Assets Turnover Ratio = Net Sales / Average Total Assets
= $3,460,000 / $1,138,000
= 3.0404
=~3.04 times

Assets Turnover Ratio = 3.04 times

Note1 : Net Sales is revenue after deducting sales return, sales discounts and sales allowances.
Note 2 : Average Total Assets is Average of Assets at the beginning & at the end of year. Can also use total assets at the end of the year.

e) Average Collection Period

Average collection period is the average time a company takes to collect its account receivable.

Credit sales = $3,460,000 * 75% = $2,595,000

Average Collection Period = 360 * (Average Accounts Receivable / Credit Sales )
= 360 * ($348,000 / 2,595,000)
= 360 * 0.1341
= 48.277
= ~48.28 days

Average Collection Period = 48.28days