 # Acid test raɵo quick assets current liabiliɵes the

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Acid-test raƟo=Quick assetsCurrent liabiliƟesThe acid-test raƟo indicates how many dollars of current assets excluding inventory andprepaid expenses exist to pay a dollar of current liabiliƟes. A raƟo of at least 1 to 1 is oŌenappropriate but this depends on the type of industry.2018:(\$10+35+200)÷745 = \$0.33 to 12017:(\$15+35+150)÷580 = \$0.34 to 1
686SoluƟons To Exercisesc.Both the current and acid-test raƟos are below the suggested guidelines. The company’sconƟnuing low acid-test raƟo in parƟcular suggests that it will likely have problems meeƟngits liabiliƟes as they become due, and that the company may be at risk of bankruptcy.EXERCISE 12–7Gross profit raƟo=Gross profitNet sales2019: \$63÷252=25%2018: \$48÷141=34%2017: \$54÷120=45%Net profit raƟo=Net incomeNet sales2019: \$12÷252=4.7%2018: \$5÷141=3.6%2017: \$15÷120=12.5%This company has a decreasing gross profit raƟo. This significantly affects net income and thenet profit raƟo. Net income and the net profit raƟo dipped significantly in 2018, but both haverebounded somewhat in 2019. The company may be facing significant compeƟƟon in recent years;hence the overall decline in the gross profit and net profit raƟos.EXERCISE 12–8TransacƟonRaƟoEffect on raƟoDeclared a cash dividendCurrent raƟoDWrote-off an uncollecƟble accountreceivableAccounts receivable collecƟon periodIPurchased inventory on accountAcid-test raƟoDIssued 10-year bonds to acquireproperty, plant, and equipmentReturn on total assetsDIssued addiƟonal shares for cashDebt to shareholders’ equity raƟoDDeclared a share dividend oncommon sharesEarnings per shareNCPurchased supplies on accountCurrent raƟoDPaid a current creditor in fullAcid-test raƟoIPaid an account payableNumber of days of sales in inventoryNC
Chapter 12 SoluƟons687EXERCISE 12–9a.i. Return on total assets=Income from operaƟonsAverage total assets= (\$36/220)= 16.4%ii. Return on shareholders’ equity=Net incomeAverage shareholders’ equity= \$20/(80 + 60)= 14.3%iii. Times interest earned raƟo=Income from operaƟonsInterest expense= \$36/6= 6 Ɵmesiv. Earnings per share=Net incomeNumber of common shares outstanding= \$20/8 shares= \$2.50v. Number of days of sales in inventory=Average inventoryCost of goods sold×365 days= \$40/50×365 days= 292 daysvi. Accounts receivable collecƟon period=Accounts receivableNet credit sales×365 days= \$20/100×365 days= 73 daysvii. Sales to total assets raƟo=Net salesAverage total assets= \$100/220= 45%viii. Current raƟo=Current assetsCurrent liabiliƟes= (\$20 + 20 + 40)/20= 4:1ix. Acid-test raƟo=Quick assetsCurrent liabiliƟes= (\$20 + 20)/20= 2:1
688SoluƟons To Exercisesx. Debt to shareholders’ equity raƟo=Total liabiliƟesShareholders’ equity= \$(20 + 60)/140)= 0.57:1b.The following raƟos are measures of liquidity:v. Number of days of sales in inventoryvi. Accounts receivable collecƟon periodviii. Current raƟoix. Acid-test raƟoEXERCISE 12–10a.Current assets + capital assets = Total liabiliƟes + shareholders’ equityCurrent assets + \$90 = \$40 + 140Current assets = \$90Current raƟo =Current assetsCurrent liabiliƟes2.5 = \$90/Current liabiliƟesCurrent liabiliƟes = \$36b.From above: Current assets = \$90; Current liabiliƟes = \$36Acid-test RaƟo =

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Term
Spring
Professor
Rebecca
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