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ACCT303 Chapter 5 Homework Solutions[1]

# ACCT303 Chapter 5 Homework Solutions[1] - E5-4 Assessing...

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1 E5-4 Assessing receivable and inventory turnover (AICPA adapted) Accounts receivable turnover = Net credit sales Average trade receivables = \$2,500,000 \$462,500 = 5.41 times where average trade receivables = \$475,000 + \$450,000 2 = \$462,500 Inventory turnover = Cost of goods sold Average inventory = \$2,000,000 \$575,000 = 3.48 times where average inventory = \$600,000 + \$550,000 2 = \$575,000 E5-5 Analyzing current and quick ratios (AICPA adapted) The write-off of obsolete inventory would decrease Todd Corporation’s current assets, thus decreasing the current ratio. The quick ratio would be unaffected by the inventory write-off because the quick ratio takes only the most liquid assets (cash, marketable securities, and receivables) into account. E5-6 Analyzing effects on current ratio (AICPA adapted) 1) The refinancing of a \$30,000 long-term mortgage with a short- term note would increase Gil’s current liabilities, decreasing the current ratio to .43 (= \$90,000/\$210,000). 2) Purchasing \$50,000 of inventory with a short-term account payable would increase Gil’s current assets to \$140,000, and increase the current liabilities to \$230,000, making the current ratio .61.

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2 3) Paying \$20,000 of short-term accounts payable decreases both the current assets and liabilities by \$20,000, making the current ratio .44. 4) Collection of \$10,000 of short-term accounts receivable has no effect on Gil’s current ratio. P5-1 Comparing profitability Requirement 1: Calculating a three-year average of the annual sales growth rates for each company are: 7-Eleven = 7.0%; Publix = 6.9%; Albertson’s = -1.6%. For example, here is the calculation for 7-Eleven. 7- Eleven Sales Growth Rates Year 1 Year 2 Year 3 Year 4 Sales \$8,251,700 \$9,178,711 \$9,622,301 \$10,109,744 Annual sales growth rate 11.2% 4.8% 5.1% Average sales growth rate 7.0% On this basis, 7-Eleven has experienced slightly stronger sales growth than Publix. Sales at Albertson’s have declined over the period. (Note: some students may have reached the same conclusion using ―compound annual growth rates‖.) Requirement 2: ROA at 7-Eleven declined from 5.5% in Year 1 to 3.1% in Year 4. ROA at the other two companies increased over the same time period from 11.9% to 13.8% at Publix and from 3.9% to 7.0% at Albertson’s. A lbertson’s has experienced the greatest improvement in profitability over the years in question.
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