Question

Question The selected financial data for Sand N Companies are presented at the end of December 2011 Net credit sales Cost of goods sold Cash Accounts receivable, net Inventory Current liabilities SRM 675.000 504,000 51,000 75,000 34,000 105,000 NEMO 560,000 450,000 20,000 70,000 160,000 100,000 CA Assume that the year-end balance shown for accounts receivable and for inventory approximate the average balances of these items through the year Required: . For each of the 2 companies, compute the following 1. Working capital 2. Current ratio 3. Acid test ratio 4. Inventory turnover and days is inventory 3. Account receivable turnover and days in receivable b. From the viewpoint of a short-term creditor, comment on the quality of each company's working capital. To which company would you prefer to sell RM20,000 in inventory 30-day account? Discuss

Answer 1

Ans(a-1): Computation of working capital are as follow:

The formula to calculate working capital are as follow:

Working Capital = Current Assets - Current Liabilities

The values given in the question are:

N Particulars Current Assets: Cash Accounts Receivable Inventories Total Current Liabilities $ $ $ 51,000 $ 75,000 $ 84,000 $ 210,000 $ 105,000 $ 20,000 70,000 160,000 250,000 100,000 S $

using the values given,

Working Capital of S = $210,000 - $105,000 = $105,000

Working Capital of N = $250,000 - $100,000 = $150,000

Ans(a-2): Computation of Current Ratio are as follow:

Formula to calculate current ratio are:

$\frac{Current.Assets}{Current.Liabilities}$

the values given in the question are:

N Particulars Current Assets: Cash Accounts Receivable Inventories Total Current Liabilities $ $ $ 51,000 $ 75,000 $ 84,000 $ 210,000 $ 105,000 $ 20,000 70,000 160,000 250,000 100,000 S $

using the values given,

Current ratio of S = ($210,000/$105,000) =$2

Current Ratio of N = ($250,000/$100,000)=$2.5

Ans(a-3): Computation of Acid-test ratio are as follow:

The formula to calculate Acid-test ratio are:

$\frac{Current.Assets-Inventories}{Current.Liabilities}$

The values given in the question are:

Particulars Inventories Current Assets: Current Liabilities $ $ $ S 84,000 $ 210,000 $ 105,000 $ 160,000 250,000 100,000

using the values given,

Acid-test ratio of S = ($210,000-$84,000)/$105,000 = $1.20

Acid-test ratio of N = ($250,000-$160,000)/$100,000 = $0.90

Ans(a-4): Computation of Inventories turnover and days in inventories are as follow:

The formula to calculate inventory turnover ratio is:

$\frac{Cost.of.goods.sold}{Inventories}$

the values given in the question are:

Particulars Cost of Goods Sold Inventories $ $ S 504,000 $ 84,000 $ 480,000 160,000

using the values given,

Inventory turnover ratio of S = ($504,000/$84,000) = 6 times

Inventory turnover ratio of N = ($480,000/$160,000) = 3 times

The formula to calculate inventory turnover in days is:

$\frac{Inventories}{Cost.of.goods.sold}X 365. days$

using the values given in the question,

Inventory turnover in days S = ($84,000/$504,000) x 365 days = 61 Days

Inventory turnover in days N = ($160,000/$480,000) x 365 days = 122 Days