Question

Chippewa Corporation reported the following items at December 31, 2018, and 2017 

Requirement

 1. Compute the company's (a) quick (acid-test) ratio and (b) days' sales outstanding for 2018. Evaluate each ratio value as strong or weak. All sales are on account with terms of net 30 days.

 (a) Enter the formula and calculate the quick (acid-test) ratio for 2018. 

Answer 1

Average accounts receivable = (Beginning accounts receivable + Ending accounts receivable)/2

= (72,000 + 58,000)/2

= $65,000

Accounts receivable turnover = Net credit sales/Average accounts receivables

= 910,000/65,000

= 14

Days' sales outstanding = 365/Accounts receivable turnover

= 365/14

= 26.07 days

or 27 days (rounded to next whole day)

Days sales outstanding may be considered as good enough since credit sales is recovered in just 27 days. Lower the days' sales outstanding, better it is.

Kindly comment if you need further assistance. Thanks