Question

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 40,000 10,000 Accounts receivable 55,000 95,000 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 40,000 30,000 Income tax payable 20,000 15,000 Total current liabilities $200,000 $155,000 During 2017, credit sales and cost of goods sold were $750,000 and $400,000, respectively. Compute the following liquidity measures for 2017: (Round current and acid-test ratios to 2 decimal places, e.g. 52.71.) 1. Current ratio :1 2. Working capital $ 3. Acid-test ratio :1 4. Accounts receivable turnover times 5. Inventory turnover times

Answer 1

Answer:

Liquidity measures for the year 2017 are as under:

Current Ratio = 1.5  

Working Capital = $100,000  

Acid Test Ratio = 0.95  

Accounts Receivables Turnover = 10 times  

Inventory turn over = 4 times  

Explanation:

Current Ratio

        Current Ratio = Current Assets ÷ Current Liabilities

                          Dec 31, 2017                                     Dec 31, 2016

                      $300,000 ÷ $200,000                   $245,000  ÷ $155,000  

Current Ratio                 1.5                                                  1.6  

Working Capital  

       Working Capital = Current Assets – Current Liabilities

                          Dec 31, 2017                                     Dec 31, 2016

                      $300,000 – $200,000                   $245,000  – $155,000

Working Capital         $100,000                                     $90,000  

 

Acid Test Ratio

        Acid Test Ratio = (Current Assets – Inventory)  ÷ Current Liabilities

                          Dec 31, 2017                                     Dec 31, 2016

($300,000 – $110,000) ÷ $200,000     ($245,000 – $90,000) ÷ $155,000

Acid Test Ratio           0.95                                                1.00  

 

Accounts Receivables Turnover Times  

Accounts Receivables Turnover = Credit Sales ÷ Average Accounts Receivables

Average Accounts Receivables = (Opening Accounts Receivables + Closing Accounts Receivables) ÷ 2

Average Accounts Receivables = ($55,000 + $95,000) ÷ 2 = $75,000

Accounts Receivables Turnover = $750,000  ÷ $75,000 = 10 Times

Inventory Turnover Times

Inventory Turnover = Cost of Goods Sold ÷ Average Inventory

Average Inventory = (Opening Inventory + Closing Inventory)  ÷ 2

Average Inventory =  ($110,000 + $90,000)  ÷ 2 = $100,000

Inventory Turnover =  $400,000  ÷ $100,000 = 4 Times