Question

Q4. The financial statements of NYC Inc. include the following items: Current Year Preceding Year ********* Balance Sheet: Cash. Short-term invesuments Na receivables Inventory Prepaid expenses Total current assets Total current liabilities. Income Statement: Net credit sales. Cost of goods sold $ 17,000 11,000 64.000 77,000 16,000 $185.000 $111.000 $ 22.000 26,000 73.000 71,000 8.000 $200,000 $ 91.000 $654.000 327.000 Requirement: Compute the following ratios for the current year: a) Current ratio b) Accounts receivable turnover c) Quick (acid-test) ratio d) Days' sales in receivables e) Inventory tumover d) Summarize the results of your analysis of the following financial statement data in a written report

Answer 1

a) Current ratio.

The current ratio indicates a company's ability to meet short-term debt obligations

Formula for Current ratio is as below.

Current Ratio = Current Assets Current liabilities

Current ratio for both years are.

Current Year Previous year Current Assets 1,85,000 2,00,000 Current Liabilities 1,11,000 91,000 Current Ratio 1.67 2.20

The current ratio indicates a company's ability to meet short-term debt obligations.

b) Accounts receivable turnover ratio.

Accounts receivable turnover ratio is an efficiency ratio that measures how efficiently a company is collecting revenue

Formula for accounts receivable turnover ratio is as below.

Accounts receivable turnover Ratio = Net Credit sales Average accounts receivable

Accounts receivable turnover ratio is calculated as below. ( Accounts receivable have to be consider as average of begining and closing accounts receivable)

Net credit sales Average accounts receivable Current Year 6,54,000 68,500!(64,000+73000)/2 Accounts receivable turnover 9.55

c) Quick (Acid test) ratio

The Quick Ratio, also known as the Acid test ratio, is a liquidity ratio that measures how sufficient a company’s short-term assets are to cover its current liabilities

Formula for Acid test ratio is as below.

Acid test ratio = Cash& cash equivalents +marketable securities +Accounts receivable Current Liabilities

Quck ratio is calculated as belows .

To arrive quick ratio we have to add cash, Marketable securities & accounts receivable and divided by current liabilities.

Current Year Previous year Cash 17,000 22,000 Marketable securities 11,000 26,000 Accounts Receivable 64,000 73,000 Current liabilities 1,11,000 91,000 Quick ratio 0.83 1.01

d) Days sales in receivables.

Day sales in receivables is shows the average number of days that it takes a customer to pay the company for sales on credit.

Receivable turnover in days = 365/receivable turnover ratio.

In this case receivale turnover in days is 38.22 (365/9.55) means approximately 38 days.

Therefore the average customer takes approximately 38 days to pay their debt to the store.

e) Inventory turnover ratio

Inventory turnover, or the inventory turnover ratio, is the number of times a business sells and replaces its stock of goods during a given period. It considers the cost of goods sold, relative to its average inventory for a year or in any a set period of time.

Formula for Inventory turnover ratio is as below.

Inventory Turnover Ratio = (Cost of Goods Sold)/(Average Inventory)

Average inventory = (77,000+71,000)/2 = 74,000

Inventory turnover ratio = 4.42 ( 327,000/74,000)

f) Summerising the data below by calculating the ratios.

Analysis of Current ratio

The higher the Current ratio, the more liquid the company is. Commonly acceptable current ratio is 2; it's a comfortable financial position for most enterprises

During current year Current ratio is 1.67 which is not less than 1 means it is able to meet its short term debt obligations but ideal rate should be 2.

During previous year it is too high (much more than 2), then the company may not be using its current assets or its short-term financing facilities efficiently.

Analysis of Quick ratio

During current year quick ratio is less than 1 whereas during previous year quick ratio is almost 1, so the performance of previous year is good compared to current year regarding quick ratio.

Analysis of days sales in receivables.

as per above data on an average customer is taking 38 days to make payment to company.

If the company policy is to collect from debtors is 30 days then the comany is not performing well.

Analysis of Inventory Turnover ratio

The business is able to sells and replace the goods 4 times in a year.