Using ratio data to evaluate a company’s financial position [20-30 min]
The comparative financial statements of Perfection Cosmetic Supply for 2012, 2011, and 2010 include the data that follow:
2012 | 2011 | 2010 | |
Balance sheet—partial | |||
Current assets: | |||
Cash..................... | $ 60,000 | $ 50,000 | $ 60,000 |
Short-term investments ...... | 155,000 | 155,000 | 120,000 |
Receivables, net............ | 300,000 | 240,000 | 260,000 |
Inventories................ | 355,000 | 320,000 | 320,000 |
Prepaid expenses ........... | 75,000 | 25,000 | 55,000 |
Total current assets ......... | $ 945,000 | $ 790,000 | $ 815,000 |
Total current liabilities......... | $ 590,000 | $ 580,000 | $ 680,000 |
Income statement—partial | |||
Sales revenue (all on account) . . . | $5,830,000 | $5,110,000 | $4,210,000 |
Requirements
1. Compute these ratios for 2012 and 2011:
a. Acid-test ratio
b. Days’ sales in receivables
c. Accounts receivable turnover
2. Considering each ratio individually, which ratios improved from 2011 to 2012 and which ratios deteriorated? Is the trend favorable or unfavorable for the company?
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