Ratios: Evaluation of Two Companies
Shown below are selected financial data for Another World and Imports, Inc., at the end of the current year:
| Another World | Imports, Inc. |
Net credit sales | $675,000 | $560,000 |
Cost of goods sold | 504,000 | 480,000 |
Cash | 53,000 | 22,000 |
Accounts receivable (net) | 75,000 | 70,000 |
Inventory | 84,000 | 160,000 |
Current liabilities | 105,000 | 100,000 |
Assume that the year-end balances shown for accounts receivable and for inventory approximate the average balances of these items throughout the year.
Instructions
a. For each of the two companies, compute the following:
1. Working capital.
2. Current ratio.
3. Quick ratio.
4. Number of times inventory turned over during the year and the average number of days required to turn over inventory (round computation to the nearest day).
5. Number of times accounts receivable turned over during the year and the average number of days required to collect accounts receivable (round computation to the nearest day).
6. Operating cycle.
b. From the viewpoint of a short-term creditor, comment on the quality of each company’s working capital. To which company would you prefer to sell $25,000 in merchandise on a 30-day open account?
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