Asked by mariam sadat on Jun 01, 2024
Verified
Booker Corporation had the following comparative current assets and current liabilities: Dec. 31,2017 Dec. 31, 2016 Current assets Cash $60,000$30,000 Short-term investments 40,00010,000 Accounts receivable 55,00095,000 Inventory 110,000$90,000 Prepaid expenses 35,000$20,000 Total current assets $300,000$245,000 Current liabilities Accounts payable $140,000$110,000 Salaries payable 40,00030,000 Income tax payable 20,00015,000 Total current liabilities $200,000$155,000\begin{array} { l r r } & \text { Dec. } 31,2017 & \text { Dec. 31, 2016 }\\\text { Current assets } \\\text { Cash } & \$ 60,000 & \$ 30,000 \\\text { Short-term investments } & 40,000 & 10,000 \\\text { Accounts receivable } &55,000 & 95,000 \\\text { Inventory } &110,000 & \$ 90,000 \\\text { Prepaid expenses } & 35,000 & \$ 20,000 \\\quad \text { Total current assets } &\$ 300,000 & \$ 245,000 \\\text { Current liabilities } & \\\text { Accounts payable } & \$ 140,000 & \$ 110,000 \\\text { Salaries payable } & 40,000 & 30,000 \\\text { Income tax payable } & 20,000 & 15,000 \\\quad \text { Total current liabilities } &\$200,000&\$155,000 \\\end{array} Current assets Cash Short-term investments Accounts receivable Inventory Prepaid expenses Total current assets Current liabilities Accounts payable Salaries payable Income tax payable Total current liabilities Dec. 31,2017$60,00040,00055,000110,00035,000$300,000$140,00040,00020,000$200,000 Dec. 31, 2016 $30,00010,00095,000$90,000$20,000$245,000$110,00030,00015,000$155,000 During 2017 credit sales and cost of goods sold were $750000 and $400000 respectively.
Instructions
Compute the following liquidity measures for 2017:
1. Current ratio.
2. Working capital.
3. Acid-test ratio.
4. Accounts receivable turnover.
5. Inventory turnover.
Acid-test Ratio
A stringent indicator of a company's liquidity, calculated by dividing liquid assets by current liabilities, to determine if it can meet short-term obligations.
Working Capital
The difference between a company's current assets and current liabilities, indicating the short-term financial health and operational efficiency.
Inventory Turnover
A ratio showing how many times a company sells and replaces its stock of goods within a certain period.
- Navigate through computing and interpreting a range of financial ratios, including assessments of liquidity, solvency, and profitability.
- Understand the impact of different transactions on financial ratios and company financial health.
Verified Answer
= Current assets ÷ Current liabilities =$300,000÷$200,000=1.5:1\begin{array} { l } = \text { Current assets } \div \text { Current liabilities } \\= \$ 300,000 \div \$ 200,000 = 1.5 : 1\end{array}= Current assets ÷ Current liabilities =$300,000÷$200,000=1.5:1
2.
Working capital =$300,000−$200,000=$100,000\begin{aligned}\text { Working capital } & = \$ 300,000 - \$ 200,000 \\& = \$ 100,000\end{aligned} Working capital =$300,000−$200,000=$100,000
3.
Ac?d-test rat?o = Cash + Short-term investments + Accounts receivable Current liabilities =$60,000+$40,000+$55,000$200,000=.78:1\begin{aligned}\text { Ac?d-test rat?o } & = \frac { \text { Cash } + \text { Short-term investments } + \text { Accounts receivable } } { \text { Current liabilities } } \\& = \frac { \$ 60,000 + \$ 40,000 + \$ 55,000 } { \$ 200,000 } = .78 : 1\end{aligned} Ac?d-test rat?o = Current liabilities Cash + Short-term investments + Accounts receivable =$200,000$60,000+$40,000+$55,000=.78:1
4. Accounts recelvable turnover = Net credit sales Averaqe accounts recervable =$750,000$75,000=10 times \text { 4. } \begin{aligned}\text { Accounts recelvable turnover } & = \frac { \text { Net credit sales } } { \text { Averaqe accounts recervable } } \\& = \frac { \$ 750,000 } { \$ 75,000 } = 10 \text { times }\end{aligned} 4. Accounts recelvable turnover = Averaqe accounts recervable Net credit sales =$75,000$750,000=10 times
b. Inventory turnover = Cost of goods sold Average inventory =$400,000∣$100,000=4 times \text { b. Inventory turnover } \begin{aligned}& = \frac { \text { Cost of goods sold } } { \text { Average inventory } } \\& = \frac { \$ 400,000 \mid } { \$ 100,000 } = 4 \text { times }\end{aligned} b. Inventory turnover = Average inventory Cost of goods sold =$100,000$400,000∣=4 times
Learning Objectives
- Navigate through computing and interpreting a range of financial ratios, including assessments of liquidity, solvency, and profitability.
- Understand the impact of different transactions on financial ratios and company financial health.
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