6LIQUIDITY CHAPTER OF SHORT-TERM ASSETS; RELATED DEBTPAYING ABILITY
MULTIPLE CHOICE
1. Company A uses lifo and Company B uses fifo for inventory valuation. Otherwise, the firms are of
similar size and have the same revenue and expense. Assume inflation. In analyzing liquidity and
profitability of the two firms, which of the following will hold true?
a. It is impossible to compare two firms with different inventory methods.
b. Company B will have relatively higher profit and higher inventory turnover.
c. Company B will have relatively higher profit and lower inventory turnover.
d. Company A will have a higher current ratio and acid test ratio, with the same profit.
e. Company B will have relatively higher profit and a higher current ratio.
ANS: E
PTS: 1
2. Which of the following would best indicate that the firm is carrying excess inventory?
a. a decline in sales
b. a decline in the current ratio
c. a decline in days' sales in inventory
d. stable current ratio with declining quick ratios
e. a rise in total asset turnover
ANS: D
PTS: 1
3. Which of the following types of businesses would normally have the shortest operating cycle?
a. a retail clothing store
b. a grocery store
c. a wholesale furniture store
d. a car manufacturer
e. a car dealer
ANS: B
PTS: 1
4. Jones Company presents the following data for 2006.
Receivables, less allowance for losses and discounts of $12,196
Net Sales
Cost of Goods Sold
The days' sales in receivables is
a. 53.1
b. 48.2
c. 43.1
d. 38.1
e. none of the answers are correct
ANS: C
PTS: 1
6-1
$ 266,700
$2,360,108
$1,580,360
5. Abbott Company presents the following data for 2006.
Receivables, end of year, less allowances for losses and discounts of
$115,960
Receivables, beginning of year, less allowance for losses and discounts of
$102,330
Net Sales
$ 2,370,100
$ 2,443,140
$24,417,090
The accounts receivable turnover in times per year is:
a. 6.9
b. 7.9
c. 10.7
d. 9.7
e. none of the answers are correct
ANS: D
PTS: 1
6. Smith Company presents the following data for 2006.
Inventories, beginning of year
Inventories, end of year
Cost of Goods Sold
Net Sales
$ 310,150
$ 340,469
$2,103,696
$8,690,150
The number of days' sales in inventory is:
a. 65.8
b. 60.8
c. 59.1
d. 58.1
e. none of the answers are correct
ANS: C
PTS: 1
7. Shaffer Company presents the following data for 2006.
Net Sales, 2006
Net Sales, 2005
Cost of Goods Sold, 2006
Cost of Goods Sold, 2005
Inventory, beginning of 2006
Inventory, end of 2006
$3,007,124
$
93,247
$2,000,326
$1,000,120
$ 341,169
$ 376,526
The merchandise inventory turnover for 2006 is:
a. 5.6
b. 15.6
c. 7.5
d. 7.7
e. none of the answers are correct
ANS: A
PTS: 1
6-2
8. Szabo Company computed the following data for 2006.
Days' sales in receivables
Accounts receivable turnover
Accounts receivable turnover in days
Days' sales in inventory
Merchandise inventory turnover
Inventory turnover in days
38.7 days
9.6 times
35.1 days
68.5 days
5.9 times
58.7 days
The estimated operating cycle for 2006 is:
a. 97.4 days
b. 107.2 days
c. 93.8 days
d. 108.0 days
e. none of the answers are correct
ANS: C
PTS: 1
9. Typically, which of the following would be considered to be the most indicative of a firm's short-term
debt paying ability?
a. working capital
b. current ratio
c. acid test
d. cash ratio
e. days' sales in receivables
ANS: B
PTS: 1
10. If a firm has pledged its receivables and its inventory, then the best indicator of its short-term liquidity
may be indicated by:
a. working capital
b. current ratio
c. acid-test
d. cash ratio
e. days' sales in receivables
ANS: D
PTS: 1
11. Which of the following would not be classified as a current asset?
a. cash
b. marketable securities
c. receivables
d. inventories
e. investments
ANS: E
PTS: 1
12. Which of the following types of business would normally have the longest operating cycle?
a. a seller of resort property
b. a car dealer
c. a car manufacturer
d. a grocery store
e. a record store
ANS: A
PTS: 1
6-3
13. Which of the following accounts would not be classified as a current asset?
a. cash restricted for retirement of bonds
b. cash and equivalents
c. cash and certificates of deposit
d. time deposits
e. cash
ANS: A
PTS: 1
14. Unrealized losses for long-term investments should usually be reported in the:
a. stockholders' equity section of the balance sheet
b. income statement
c. current assets section of the balance sheet
d. current liabilities section of the balance sheet
e. long-term liabilities section of the balance sheet
ANS: A
PTS: 1
15. Which of the following does not bear on the quality of receivables?
a. shortening the credit terms
b. lengthening the credit terms
c. right of return privilege
d. lengthening the outstanding period
e. all of the answers bear on the quality of receivables
ANS: E
PTS: 1
16. Which of the following reasons should not be considered in order to explain why the receivables
appear to be abnormally high?
a. Sales volume expanded materially late in the year.
b. Receivables have collectibility problems and possibly some should have been written off.
c. The company seasonally dates invoices.
d. Material amount of receivables are on the installment basis.
e. Sales volume decreases materially late in the year.
ANS: E
PTS: 1
17. Which of the following is not an acceptable inventory costing method?
a. specific identification
b. last-in, first-out (lifo)
c. first-in, first-out (fifo)
d. average cost
e. next-in, first-out (nifo)
ANS: E
PTS: 1
6-4
18. Which of the following would not be a reasonable conclusion when comparing lifofifo under an
inflationary condition?
a. Lifo generally results in a lower profit than does fifo.
b. Fifo reports a higher inventory ending balance.
c. Lifo results in a lower profit figure than does fifo.
d. Lifo would probably be used for inventory that has a high turnover rate because there
would be an immaterial difference in the results between lifo and fifo.
e. The cash flow under lifo is greater than the cash flow under fifo by the difference in the
resulting tax between the two methods.
ANS: D
PTS: 1
19. Which of the following current assets will not generate cash in the future?
a. prepayments
b. accounts receivable
c. inventory
d. marketable securities
e. notes receivable
ANS: A
PTS: 1
20. Which of the following ratios does not represent some form of comparison between accounts in
current assets and accounts in current liabilities?
a. working capital
b. current ratio
c. acid-test ratio
d. cash ratio
e. merchandise inventory turnover
ANS: E
PTS: 1
21. Which of the following ratios would generally be used to evaluate a firm's overall liquidity position?
a. working capital
b. current ratio
c. acid-test ratio
d. cash ratio
e. inventory turnover in days
ANS: B
PTS: 1
TRUE/FALSE
1. Compensating balances reduce the amount of cash available to the borrower to meet obligations and
they decrease the effective interest rate for the borrower.
ANS: F
PTS: 1
2. To qualify as a marketable security, the investment must be readily marketable and it must be the
intent of management to convert the investment to cash within the current operating cycle or a year,
whichever is longer.
ANS: T
PTS: 1
6-5
3. In terms of liquidity, it is to management's advantage to show investments under investments instead
of marketable securities.
ANS: F
PTS: 1
4. By reporting marketable equity securities under current assets, management picks up a liquidity
advantage.
ANS: T
PTS: 1
5. The valuation problem from waiting to collect a receivable is ignored in the valuation of receivables
and notes that are classified as current assets.
ANS: T
PTS: 1
6. Under the allowance method, the charge off of a specific account receivable does not influence the
income statement nor the net receivable on the balance sheet at the time of the charge off.
ANS: T
PTS: 1
7. Using the direct write-off method, the bad debt expense that is recorded as a specific customer's
account is determined to be noncollectible.
ANS: T
PTS: 1
8. The direct write-off method frequently results in the bad debt expense being recognized in the year
subsequent to the sale, and thus results in a proper matching of expense with revenue.
ANS: F
PTS: 1
9. When a company has receivables that are due beyond one year or accounting cycle from the balance
sheet date, and when it is the industry practice to include these receivables in current assets, they will
be included in current assets even though they do not technically meet the guidelines to qualify as
current assets.
ANS: T
PTS: 1
10. The receivables of a company with installment receivables would normally be considered to be of
higher quality than the receivables of a company that did not have installment receivables.
ANS: F
PTS: 1
11. If days' sales in receivables are materially longer than the credit terms, this indicates a collection
problem.
ANS: T
PTS: 1
12. The days' sales in receivables ratio gives an indication of the length of time that the receivables have
been outstanding at the end of the year. This indication can be misleading if sales are seasonal and/or
the company uses a natural business year.
ANS: T
PTS: 1
6-6
13. Days' sales in receivables may be abnormally high at the end of the year if sales volume expanded
materially late in the year.
ANS: T
PTS: 1
14. Days' sales in receivables may be abnormally high if a material amount of sales are on a cash basis.
ANS: F
PTS: 1
15. When doing external analysis, many of the reasons why the days' sales in receivables is abnormally
high or low cannot be determined without access to internal information.
ANS: T
PTS: 1
16. Inventory is particularly sensitive to changes in business activity. Therefore, management should keep
inventory at a minimum.
ANS: F
PTS: 1
17. Because the cost of specific inventory items is not usually practical to determine, it is necessary for
management to select a cost flow assumption.
ANS: T
PTS: 1
18. A firm that has been on lifo for many years may have some inventory costs that go back ten years or
more.
ANS: T
PTS: 1
19. Under inflationary conditions, fifo generally results in a lower profit than does lifo, and this difference
can be substantial.
ANS: F
PTS: 1
20. A low sales to working capital ratio tentatively indicates an unprofitable use of working capital.
ANS: T
PTS: 1
21. Working capital of a business is the excess of current assets over current liabilities.
ANS: T
PTS: 1
22. The lifo inventory costing method usually results in working capital being overstated.
ANS: F
PTS: 1
23. The lifo inventory costing method results in the acid-test ratio being overstated.
ANS: F
PTS: 1
24. The cash ratio is usually a good indication of the liquidity of the firm.
ANS: F
PTS: 1
6-7
25. Management should usually strive to keep the cash ratio high.
ANS: F
PTS: 1
26. The ability of an entity to maintain its short-term, debt-paying ability is important to all users of
financial statements.
ANS: T
PTS: 1
27. Even an entity on a very profitable course will find itself bankrupt if it fails to meets its obligations to
short-term creditors.
ANS: T
PTS: 1
28. Current assets are assets that (1) are in the form of cash, (2) will be realized in cash, or (3) conserve the
use of cash within the operating cycle of a business or for one year , whichever is shorter.
ANS: F
PTS: 1
29. The operating cycle is the time between the acquisition of inventory and the realization of cash from
selling the inventory.
ANS: T
PTS: 1
30. In order to classify cash as a current asset, it must be free from any restrictions that would prevent its
deposit or use to pay creditors classified as long-term.
ANS: F
PTS: 1
31. The use of the allowance for doubtful accounts results in the bad debt expense being charged to the
period of sale.
ANS: T
PTS: 1
32. Customer concentration can be an important consideration in the quality of receivables.
ANS: T
PTS: 1
33. A shortening of the credit terms is an indication that there will be more risk in the collection of future
receivables.
ANS: F
PTS: 1
34. The company with the natural business year tends to overstate its accounts receivable turnover, thus
overstating its liquidity.
ANS: T
PTS: 1
35. The election to use lifo for taxes governs the firm's financial reporting.
ANS: T
PTS: 1
6-8
36. If the company closes the year when the activities are at a peak, the number of days' sales in inventory
would tend to be overstated and the liquidity would be overstated.
ANS: F
PTS: 1
37. An approximation of the operating cycle can be determined from the receivable liquidity figures and
the inventory liquidity figures.
ANS: T
PTS: 1
38. Working capital is considered to be more indicative of the short-term, debt-paying ability than is the
current ratio.
ANS: F
PTS: 1
39. Liquidity problems with receivables and/or inventory means that the current ratio needs to be much
higher than when there are no such liquidity problems.
ANS: T
PTS: 1
40. Significant weight is seldom given to the cash ratio unless the firm is in financial trouble.
ANS: T
PTS: 1
PROBLEMS
1. Required:
Determine the cost of goods sold of a firm with the financial data given below:
Current Ratio
Acid-Test Ratio*
Current Liabilities
Inventory Turnover (using ending inventory)
2.4 to 1
2.1 to 1
$400,000
4 times
*Assume that the acid test ratio is computed as follows:
Current Assets - Inventory
Current Liabilities
6-9
ANS:
Current Ratio =
Current Assets
Current Liabilities
=
X
$400,000
= 2.4
Current Assets = ($400,000)(2.4) = $960,000
Acid-Test Ratio =
Current Assets - Inventory
Current Liabilities
$960,000 - X
Inventory Turnover =
=
$960,000 - X
$400,000
= 2.1
= $840,000
= $120,000
Cost of Goods Sold =
X
=4
Inventory
$120,00
0
Cost Goods of Sold = $480,000
PTS: 1
2. Each of the following would generally be thought of as a favorable indicator of the firm's financial
position:
a.
b.
c.
A current ratio well above 2.0, which is substantially higher than that for other firms in the
industry.
Collection period significantly lower than for several recent periods.
Rapidly rising merchandise inventory turnover.
Required:
In each case, give an example of circumstances underlying the ratio that might represent an
unfavorable development.
ANS:
a. A high current ratio can mean overstocked inventory or doubtful receivables. Either of these
accounts being high could cause the current ratio to be misleading.
b. The firm may have substantially tightened its credit policy. This might have resulted in a
major loss of customers.
c. Rapidly rising turnover might mean that production is unable to generate goods as quickly as
possible and that the firm is running a risk of stockouts.
PTS: 1
6-10
3. Required:
How will switching from fifo to lifo for inventory valuation affect financial analysis of liquidity and
profitability? Cite two ratios that will be affected and indicate how they will change. (Assume an
inflationary condition.)
ANS:
Lifo inventory valuation results in higher cost of sales and lower inventory valuation.
It will cause lower profitability and tax outflow. Merchandise inventory turnover will appear much
higher, since the cost of sales will be higher and average inventory much lower. Days' sales in
inventory will be lower, since the cost of sales will be higher, giving higher daily cost of sales to
divide into lower inventory. The liquidity position will be reduced in terms of working capital and the
current ratio.
PTS: 1
4. Decort Company's working capital accounts at December 31, 2006, are given below:
Current Assets:
Cash
Marketable Securities
Accounts Receivable
Less Allowance for Doubtful Accounts
Inventory, Lifo
Prepaid
Total Current Assets
$100,000
50,000
$250,000
(20,000)
Current Liabilities:
Accounts Payable
Notes Payable
Taxes Payable
Accrued Liabilities
Total Current Liabilities
230,000
300,000
8,000
$688,000
$200,000
50,000
10,000
30,000
$290,000
During 2007, DeCort Company completed the following transactions:
a. Purchased fixed assets for cash, $20,000.
b. Exchanged DeCort Company common stock for land. Estimated value of transaction,
$80,000.
c. Payment of $40,000 on short-term notes payable.
d. Sold marketable securities costing $20,000 for $25,000 cash.
e. Sold DeCort Company common stock for $70,000.
f. Wrote off an account receivable in the amount of $20,000.
g. Declared a cash dividend in the amount of $5,000.
h. Paid the above cash dividend.
i. Sold inventory costing $10,000 for $15,000 cash.
j. Sold inventory costing $5,000 for $8,000 on account.
k. Paid accounts payable in the amount of $20,000.
l. Sold marketable securities costing $20,000 for $20,000 cash.
m. Issued a credit memo on an account receivable, $1,000.
6-11
Required:
a. Compute the following as of December 31, 2006:
1. working capital
2. current ratio
3. acid-test ratio (conservative)
4. cash ratio
(These ratios are to be computed using only the December 31, 2006 data.)
b. For 2007, indicate the effect of each of the transactions given on working capital, current
ratio, acid-test ratio, and cash ratio. Give the effect in terms of +, - , or none. Consider each
transaction to be the first transaction of the year. Assume at the start of the year that the
current ratio is over 2 to 1, the acid-test ratio is over 1 to 1, and the cash ratio is less than 1 to
1.
Format:
Transaction
The Effect On
AcidCurrent
Test
Ratio
Ratio
Working
Capital
Cash
Ratio
ANS:
a. 1. Working Capital = Current Assets - Current Liabilities
= $688,000 - $290,000
= $398,000
Current Assets
2. Current Ratio = Current Liabilities
=
$688,000
$290,000
= 2.37
3. Acid-Test Ratio =
Cash Equivalents + Marketable Securities + Net Receivables
Current Liabilities
= $100,000 + $50,000 + $230,000 = 1.31
$290,000
4. Cash Ratio =
Cash Equivalents + Marketable Securities
Current Liabilities
=
$100,000 + $50,000
$290,000
6-12
= 0.52
b.
Transaction
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
m.
Working
Capital
The Effect On
Acid
Current
Test
Ratio
Ratio
none
none
+
+
none
none
+
+
none
none
-
none
+
+
+
none
+
+
+
+
none
-
Cash
Ratio
none
+
+
+
none
+
+
+
+
none
-
none
+
+
none
+
none
none
none
PTS: 1
5. Bill's Produce does 60 percent of its business during June, July, and August.
For Year Ended
For Year Ended
December 31, 2006 July 31, 2006
Net Sales
Receivables, less allowance for
doubtful accounts:
$700,000
Beginning of period
(allowance, January 1, $2,000; August
1, $3,000)
$ 45,000
$ 80,000
$ 50,000
$ 85,000
End of period
(allowance, December 31,
$3,000; July 31,
$3,500)
$690,000
Required:
a. Compute the days' sales in receivables for July 31, 2006, and December 31, 2006, based on
the data above.
b. Compute the accounts receivable turnover for the period ended July 31, 2006, and December
31, 2006.
c. Comment on the results from (a) and (b).
6-13
ANS:
a. Days' sales in receivables
Gross Receivables
Net Sales/365
December 31, 2006
July 31,
2006
$ 53,000 $ 88,500
$ 700,000
$ 690,000
365
365
= 27.6
b. Accounts Receivable =
= 46.8
Net Sales
Average Gross Receivables
December 31, 2006:
$700,000
= 14.0
($47,000 + $53,000) / 2
July 31, 2006:
$690,000
= 8.0
($83,000 + $88,500) / 2
c. Bill's Produce is a seasonal business. Therefore, the computation of days' sales in receivables
and accounts receivable turnover are not realistic. These figures would be helpful when
comparing with prior years on the same date.
PTS: 1
6. Required:
a. Stark Company has computed its accounts receivable turnover in days to be 36. Compute the
accounts receivable turnover per year.
b. Stark Company has computed its accounts receivable turnover per year to be 10. Compute
the accounts receivable turnover in days.
c. Stark Company has gross receivables at the end of the year of $380,000 and net sales for the
year of $1,850,000. Compute the days' sales in receivables at the end of the year.
d. Stark Company has net sales of $2,500,000 and average gross receivables of $224,000.
Compute the accounts receivable turnover.
6-14
ANS:
a. Accounts Receivable Turnover =
b. Accounts Receivable
Turnover in Days =
365
Receivable Turnover in Days
365
Accounts Receivable Turnover per Year
c. Days' Sales in Receivables =
Gross Receivables
Net Sales / 365
=
365
36
=
=
365 =
10
=
36.5
days
$380,000
$1,850,000 / 365
=
10.1
Times
$2,500,000
$224,000
= 75.0 days
d. Accounts Receivable =
Sales
Average Gross Receivables
= 11.2 times
PTS: 1
7. Alpha Company would like to estimate how long it will take to realize cash from its ending inventory.
For this purpose the following data are submitted:
Accounts Receivable, less allowance for doubtful accounts of $40,000
Ending Inventory
Net Sales
Cost of Goods Sold
Days' Sales in Inventory =
Ending Inventory
Cost of Goods Sold / 365
Days' Sales in Receivables =
Gross Receivables
Net Sales / 365
Required:
Estimate how long it will take to realize cash from the ending inventory.
ANS:
$750,000
$4,250,000 / 365
= 64.4
$700,000
$5,650,000 / 365
64.4 + 45.2 = 109.6 days
PTS: 1
6-15
= 45.2
$660,000
$750,000
$5,650,000
$4,250,000
8. Hind Company presents the following data for 2006:
Accounts Receivable, less allowance for doubtful accounts of $40,000
Ending Inventory, lifo (estimated replacement cost $800,000)
Net Sales
Cost of Goods Sold (estimated replacement cost, $4,150,000)
$780,000
$500,000
$4,750,000
$3,550,000
Required:
a. Compute the days' sales in receivables.
b. Compute the days' sales in inventory, using the cost figure.
c. Compute the days' sales in inventory, using the replacement cost for the inventory and the
cost of goods sold.
d. Explain which days' sales in inventory figure is probably more realistic, the one computed in
(b) or (c).
ANS:
a.
Days' Sales in Receivables =
=
b.
$820,000
$4,750,000 / 365
= 63.0
Days' Sales in Inventory
=
c.
$500,000
$3,550,000 / 365
Gross Receivables
Net Sales / 365
=
Inventory
Cost of Goods Sold / 365
= 51.4
Days' Sales in Inventory (using the replacement cost)
=
$800,000
$4,150,000 / 365
=
Inventory
Estimated Goods sold
= 70.36
d. The days' sales in inventory figure computed in (c) is probably more realistic because it
compares similar costs for both inventory and cost of goods sold.
PTS: 1
6-16
9. Required:
Comment on the usual influence from a switch to lifo from fifo on the following variables during an
inflationary period:
a.
b.
c.
d.
e.
f.
revenue
gross profit
cost of goods sold
profit
income taxes
cash flow
ANS:
a. A switch to lifo will usually not influence revenue because revenue is usually more
demand/supply-related than cost-related.
b. Gross profit will usually decline because of higher cost of goods sold.
c. Cost of goods sold will increase because of using the most recent cost.
d. Profits will decrease because of the higher cost of goods sold.
e. Income taxes will decrease because of the lower profit.
f. Cash flow will increase because of the lower taxes.
PTS: 1
10. Anne Elizabeth Company's Balance Sheet for December 31, 2006, and Income Statement For the Year
Ended December 31, 2006, are given below.
Balance Sheet
Anne Elizabeth Company
December 31, 2006
2006
Assets:
Current Assets:
Cash
Marketable Securities
Accounts Receivable, less allowance of $10,000
Inventory, Lifo
Prepaid
Total Current Assets
2005
Less Accumulated Depreciation
Total Assets
6-17
$ 28,538
20,500
50,000
70,000
7,000
$176,038
9,000
220,000
$229,000
(68,000)
$394,450
Property, Plant, and Equipment:
Land
Buildings and Equipment
$ 50,450
25,000
60,000
90,000
8,000
$233,450
8,000
210,000
$218,000
(60,000)
$334,038
Liabilities and Shareholders' Equity:
Current Liabilities:
Accounts Payable
Accrued Compensation
Income Taxes
Total Current Liabilities
$ 35,000
8,000
7,000
$ 50,000
40,000
Shareholders' Equity:
Common Shares
Retained Earnings
Total Liabilities and Shareholders' Equity
11,038
60,000
244,450
$304,450
$394,450
Long-Term Debt
$ 30,000
7,000
6,000
$ 43,000
60,000
220,000
$280,000
$334,038
Income Statement
Anne Elizabeth Company
For the Year Ended December 31, 2006
2006
Earnings before income taxes
Income taxes
Net earnings
Required:
a. Compute the following ratios for 2006:
1. Accounts receivable turnover
2. Merchandise inventory turnover
3. Working capital
4. Current ratio
5. Acid-test ratio (conservative)
6. Sales to working capital
6-18
$650,500
$640,000
520,000 515,000
$130,500
$125,000
$ 71,000
4,000
$ 75,000
$ 63,500
30,000
$ 33,500
Operating expenses:
Selling, general, and administrative
Interest
2005
$718,500
580,000
$138,500
Net sales
Cost of goods sold
Gross profit
2004
$ 67,000
3,000
$ 70,000
$ 60,500
29,000
$ 31,500
$ 65,000
2,500
$ 67,500
$ 57,500
28,000
$ 29,500
ANS:
1. Accounts receivable turnover =
Net Sales
Average Gross Receivables
$718,500
[($60,000 + $10,000) + ($50,000 + $10,000)] / 2
2.
Merchandise Inventory Turnover =
$580,000
($90,000 + $70,000) / 2
=
=
$718,500
$65,000
= 11.05
Cost of Goods Sold = 7.25
Average Inventory
$580,000
$80,000
= 7.25
3. Working capital = Current Assets - Current Liabilities
$233,450 - $50,000 = $183,450
4. Current ratio = Current assets/Current liabilities
$233,450
$50,000
5.
= 4.67
Acid-Test Ratio
=
Cash equivalents + Marketable Securities + Net Receivables
Current Liabilities
$50,450 + $25,000 + $60,000
$50,000
6.
Sales to Working Capital =
=
$135,450
$50,000
= 2.71
Sales
Average Working Capital
$718,500
[($233,450 - $50,000) + ($176,038 - $43,000] / 2 =
PTS: 1
6-19
$718,500
$158,244
= 4.54
11. Listed below are several ratios:
a.
b.
c.
d.
e.
f.
g.
h.
i.
j.
k.
l.
days' sales in receivables
accounts receivable turnover
accounts receivable turnover in days
days' sales in inventory
inventory turnover
inventory turnover in days
operating cycle
working capital
current ratio
acid-test ratio
cash ratio
sales to working capital
Required:
Match the letter that goes with each formula.
_____ 1.
Sales
Average Working Capital
_____ 2.
Net Sales
Average Gross Receivables
_____ 3.
_____ 4.
_____ 5.
_____ 6.
_____ 7.
Current Assets - Current Liabilities
Cash Equivalents + Marketable Securities + Net Receivables
Current Liabilities
Gross Receivables
Net Sales/365
Average Gross Receivables
Net Sales/365
Average Inventory
Cost of Goods Sold/365
_____ 8.
Cash Equivalents + Marketable Securities
Current Liabilities
_____ 9.
Current Assets
Current Liabilities
_____ 10.
Accounts Receivable
Turnover in Days
_____ 11.
Inventory Turnover
in Days
Cost of Goods Sold
Average Inventory
_____ 12.
+
Ending Inventory
Cost of Goods Sold/365
6-20
ANS:
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11.
12.
l
b
h
j
a
c
f
k
i
g
e
d
PTS: 1
12. The following are the inventory records of the Garret Company:
Units
40
January 1
Purchases:
February 10
July 15
November 1
December 10
20
40
50
Cost
$12 $480
13
14
15
16
30
Available
Total
260
560
750
48
0
180
$2,530
Ending inventory consists of 30 units from the July purchase.
Note: The company uses a periodic inventory system.
Required:
Calculate ending inventory and cost of sales, using: (a) FIFO, (b) LIFO, (c) average, and (d) specific
identification.
6-21
ANS:
a. FIFO
Ending Inventory
30 $16 = $480
Cost of Sales
$2,530 - $480 = $2,050
Ending Inventory
30 $12 = $360
Cost of Sales
$2,530 - $360 = $2,170
b. LIFO
c. Average
Ending Inventory
180 $2,530 = $14.06
30 $14.06 = $421.80
d. Specific identification
Ending Inventory
30 $14 = $420
Cost of Sales
$2,530 - $421.80 = $2,108.20
Cost of Sales
$2,530 - $420 = $2,110
PTS: 1
6-22