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Q18E

Expert-verified
Horngren'S Financial And Managerial Accounting
Found in: Page 841

Short Answer

The financial statements of Valerie’s Natural Foods include the following items:

Compute the following ratios for the current year:

  1. Current ratio

  2. Cash ratio

  3. Acid-test ratio

  4. Inventory turnover

  5. Day’s sales in inventory

  6. Day’s sales in receivables

  7. Gross profit percentage

Answer

  1. CR= 1.40:1

  2. Cash Ratio = 0.26:1

  3. Acid Test Ratio= 0.70:1

  4. Inventory Turnover Ratio= 4.10 times

  5. Days sales in Inventory= 89 days

  6. Days sales in receivables= 58 days

  7. Gross Profit % =34.45%

See the step by step solution

Step by Step Solution

Step 1: Current Ratio

Current Ratio = Current Assets/Current Liabilities

= $190,000/136,000

= 1.40:1

Step 2: Cash Ratio

Cash Ratio= Cash & Cash Equivalent /Current Liabilities

Cash & Cash Equivalent = Cash + Short term investment

=$16,000+ $19,000

= $35,000/$136,000

Cash Ratio =0.26:1

Step 3: Acid Test Ratio

Acid Test Ratio = Quick Assets/Current liabilities

Quick Assets: Total Current Assets- Prepaid Exp- Inventory

Quick Assets =$190,000 -$ 78,000 - $17,000

= $95,000

Acid Test Ratio = $95,000 / $136,000

Acid Test Ratio =0.70:1

Step 4: Inventory Turnover Ratio

Inventory Turnover Ratio= Cost of Goods Sold/ Average Inventory.

Average Inventory = Beginning Inventory + Ending Inventory / 2

=$78,000+ $74,000 /2

Average Inventory= $76,000

Inventory turnover ratio = $312,000/$76,000

= 4.10 times

Step 5: Days Sales in Inventory

Days Sales in Inventory = No of Days in Year/ Inventory Turnover Ratio

=365 / 4.10

= 89 days

Step 6: Days Sales in Receivable

Days Sales in Receivable = (Average Accounts Receivable / Total Credit Sales) x 365

Average Accounts Received = $60,000 + $92,000 / 2

= $76,000

Days Sales In Received = $76,000/ $476,000 x365

Days Sales In Received = 58 days

Gross Profit Percentage = (Gross Profit / Net Sales) x 100

Gross Profit = Sales- Cost of Goods Sold

= ($476.000 - $312,000)/$476,000

= 34.45 %

Most popular questions for Business-studies Textbooks

Ross’s Lipstick Company’s long-term debt agreements make certain demands on the business. For example, Ross may not purchase treasury stock in excess of the balance of retained earnings. Also, long-term debt may not exceed stockholders’ equity, and the current ratio may not fall below 1.50. If Ross fails to meet any of these requirements, the company’s lenders have the authority to take over management of the company.Changes in consumer demand have made it hard for Ross to attract customers.

Current liabilities have mounted faster than current assets, causing the current ratio to fall to 1.47. Before releasing financial statements, Ross’s management is scrambling to improve the current ratio. The controller points out that an investment can be classified as either long-term or short-term, depending on management’s intention. By deciding to convert an investment to cash within one year, Ross can classify the investment as short-term—a current asset. On the controller’s recommendation, Ross’s board of directors votes to reclassify long-term investments as short-term.

Requirements

1. What effect will reclassifying the investments have on the current ratio? Is Ross’s true financial position stronger as a result of reclassifying the investments?

2. Shortly after the financial statements are released, sales improve; so, too, does the current ratio. As a result, Ross’s management decides not to sell the investments it had reclassified as short-term. Accordingly, the company reclassified the investments as long-term. Has management behaved unethically? Give the reasoning underlying of your answer.

Using ratios to decide between two stock investments

Assume that you are purchasing an investment and have decided to invest in a company in the digital phone business. You have narrowed the choice to Digitalized Corp. and Every Zone, Inc. and have assembled the following data.

Selected income statement data for the current year:

Digitalized

Every Zone

Net sales revenue (all on credit)

$423,035

$493,845

Cost of goods sold

210,000

260,000

Interest expenses

0

19,000

Net income

51,000

72,000

Selected balance sheet and market price data at the end of the current year:

Digitalized

Every Zone

Current assets:

Cash

$24,000

$17,000

Short-term investment

40,000

14,000

Accounts receivables, Net

40,000

48,000

Merchandise inventory

66,000

97,000

Prepaid expenses

23,000

12,000

Total current assets

$193,000

$188,000

Total assets

266,000

323,000

Total current liabilities

105,000

96,000

Total liabilities

105,000

128,000

Common stock

$1 par (12,000 shares)

12,000

$1 par (17,000 shares)

17,000

Total stockholders equity

161,000

195,000

Market price per share of common stock

76.50

114.48

Dividend paid per common stock

1.10

1.00

Selected balance sheet data at the beginning of the current year:

Digitalized

Every Zone

Balance sheet:

Accounts Receivable, net

$41,000

$54,000

Merchandise Inventory

81,000

87,000

Total Assets

261,000

272,000

Common Stock:

$1 par (12,000 shares)

12,000

$1 par (17,000 shares)

17,000

Your strategy is to invest in companies that have low price/earnings ratios but appear to be in good shape financially. Assume that you have analyzed all other factors and that your decision depends on the results of ratio analysis.

Requirements

  1. Compute the following ratios for both companies for the current year:

a. Acid-test ratio

b. Inventory turnover

c. Days’ sales in receivables

d. Debt ratio

e. Earnings per share of common stock

f. Price/earnings ratio

g. Dividend payout

2. Decide which company’s stock better fits your investment strategy.

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