Question

Note the industry average ratios below:

• A/R days (based on average balances) = 57 days
• A/P days (based on average balances) = 23 days
• Current ratio (based on ending balance) = 1.8x

Based on Acme’s A/R days, A/P days and Current ratios for the nine months ending September 30, 2017, which of the following conclusions is most accurate? Assume 273 days in the nine months ending September 30, 2017 and 365 days in the year.

Compared to the industry average:

A. Acme has more favorable collection terms but less favorable payment terms with vendors.

B. Acme has more favorable collection terms and more favorable payment terms with vendors.

C. Acme has less favorable collection terms and less favorable payment terms with vendors.

D. Acme has less favorable payment terms with vendors and a less favorable current ratio.

E. Acme has less favorable collection terms and less favorable current ratio.

Septe mber 30, December 31 unaudited) ASSETS Current assets: Cash and cash equivalents 799,015 $ 791,834 Accounts receivable (net of allowances of $1,689 and S1,035 at September 30, 2017 and 309,196 December 31, 2016, respectively Prepaid income taxes Prepaid and other assets 221,504 12,389 7,420 29,943 Total current assets 1,153,081 1,055,670 Property, equipment and leasehold improvements (net of accumulated depreciation and amortization of $164,804 and $136,841 at September 30, 2017 and December 31, 2016, respectively) Goodwill 85,680 95,585 1,555,850 1,560,169 Intangible assets (net of accumulated amortization of $497,114 and $462,860 at September 30, 2017 and December 31, 2016, respectively 328,326 347,640 Deferred tax assets 11,091 Other non-current assets 16,125 18,302 3,154,472 $ 3,082,578 Total assets LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable 2,385 $ 102,581 568 119,113 Accrued compensation and related benefits Other accrued liabilities 83,821 82,531 374,730 334,358 563,517 Total current liabilities 536,570 2,077,370 84,432 2,075.201 Long-term debt Deferred taxes 94,067 68,839 Other non-current liabilities 59,135 794,158 Total liabilities 2,764,973 Commitments and Contingencies (see Note 6 and Note 7) Shareholders' equity: Preferred stock (par value $0.01, 100,000,000 share authorized; no shares issued Common stock (par value $0.01; 750,000,000 common shares aut horized; 129,505,173 and 128,996,344 common shares issued and 90,067,232 and 91,279,590 common shares outstanding at September 30, 2017 and December 31, 2016, respectively) Treasury shares, at cost (39 437,941 and 37,716,754 common shares held at September 30, 2017 and December 31, 2016, respectively) Additional paid in capital Retained earnings Accumulated other comprehensive loss 1,295 (2,321,862) 1,255,616 (2,170,739) 1225,565 1,322,224 ,475,347 50,082) (60,735) Total shareholders' equity 60,314 317,605 3,154,472 $ Total liabilities and shareholders' equity ,082,578 Three Months Ended Nine Months Ended September 30 September 3 2017 2017 2016 2016 (unaudited) 288,433 S 939,393 S 322,097 $ 857,857 Operating revenues Operating expenses: 68,491 44,918 Cost of revenues 62,986 204,607 188,288 Selling and marketing Research and development General and administrative 41,514 129,526 125,057 17,983 18,750 55,163 64,555 56,244 22,103 21,859 65,768 11,752 32,987 35,535 Amortization of intangible assets Depreciation and amortization of property, equipment and leasehold improvements 10,614 27,322 9,325 8,312 24,873 173,434 165,173 514,160 Total operating expenses 495,765 148,663 123,260 425,233 362,092 Operating income (1,835) 29,020 (799) 26,790 (4,077) Interest income (2,005) 72,612 87,071 Interest expense 2,300 Other expense (income) 675 (253) 2,642 27,860 25,738 73,249 Other expense (income), net 85,294 Income before provision for income taxes 120,803 97,522 339,939 288,843 Provision for income taxes 35,650 32,241 96,238 100,569 85,153$ 65,28 $ 239,370 $ Net income 192,605

Answer 1

Current Ratio = Current Assets / Current Liabilities
= 1,153,081 / 563,517
= 2.046

A/R Days = Average AR / Annual Revenue X 273 days
= ((221504 + 309196)/2) / 939,393 X 273 days
= 77.11 days

A/P Days = 273 days / (Total supplier purchases ÷ ((Beginning accounts payable + Ending accounts payable) / 2))
= (204,607 / (568 +2385) / 2)
= 1.97 days

The correct answer is Option C

Acme is giving favorable terms to its customers which is less favorable to it than industry standard. Acme is making quick payments to its vendors so it has less favorable payment terms with vendors as well.