E15-7
Bennis Company has the following comparative balance sheet data.
BENNIS COMPANY
Balance Sheets
December 31
2009 2008
Cash $ 15,000 $ 30,000
Receivables (net) 70,000 60,000
Inventories 60,000 50,000
Plant assets (net) 200,000 180,000
$345,000 $320,000
Accounts payable $50,000 $60,000
Mortgage payable (15%) 100,000 100,000
Common stock, $10 par 140,000 120,000
Retained earnings 55,000 40,000
$345,000 $320,000
Additional information for 2009:
1. Net income was $25,000.
2. Sales on account were $410,000. Sales returns and allowances were $20,000.
3. Cost of goods sold was $198,000.
Instructions
Compute the following ratios at December 31, 2009. (Round answers to 1 decimal place, e.g. 10.5.)
(a) Current ratio : 1
(b) Acid-test ratio : 1
(c) Receivables turnover times
(d) Inventory turnover times
(a) Current ratio:
To calculate the current ratio, we need to divide current assets by current liabilities.
Current assets = Cash + Receivables + Inventories = $15,000 + $70,000 + $60,000 = $145,000
Current liabilities = Accounts payable = $50,000
Current ratio = Current assets / Current liabilities = $145,000 / $50,000 = 2.9 : 1
(b) Acid-test ratio:
To calculate the acid-test ratio, we need to exclude inventories from current assets as they are not easily convertible to cash.
Current assets (excluding inventories) = Cash + Receivables = $15,000 + $70,000 = $85,000
Acid-test ratio = Current assets (excluding inventories) / Current liabilities = $85,000 / $50,000 = 1.7 : 1
(c) Receivables turnover:
To calculate the receivables turnover, we need to divide net credit sales by average accounts receivable.
Net credit sales = Sales on account - Sales returns and allowances = $410,000 - $20,000 = $390,000
Average accounts receivable = (Opening receivables + Closing receivables) / 2 = ($60,000 + $70,000) / 2 = $65,000
Receivables turnover = Net credit sales / Average accounts receivable = $390,000 / $65,000 = 6.0 times
(d) Inventory turnover:
To calculate the inventory turnover, we need to divide cost of goods sold by average inventory.
Average inventory = (Opening inventory + Closing inventory) / 2 = ($50,000 + $60,000) / 2 = $55,000
Inventory turnover = Cost of goods sold / Average inventory = $198,000 / $55,000 = 3.6 times
So, the ratios are:
(a) Current ratio: 2.9 : 1
(b) Acid-test ratio: 1.7 : 1
(c) Receivables turnover: 6.0 times
(d) Inventory turnover: 3.6 times
To compute the requested ratios, we will use the following formulas:
(a) Current Ratio = Current Assets / Current Liabilities
(b) Acid-test Ratio = (Current Assets - Inventory) / Current Liabilities
(c) Receivables Turnover = Net Credit Sales / Average Accounts Receivable
(d) Inventory Turnover = Cost of Goods Sold / Average Inventory
To begin, we need to calculate the necessary values for the formulas:
Net Credit Sales = Sales on Account - Sales Returns and Allowances
Net Credit Sales = $410,000 - $20,000 = $390,000
Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2
Average Accounts Receivable = ($60,000 + $70,000) / 2 = $65,000
Average Inventory = (Beginning Inventory + Ending Inventory) / 2
Average Inventory = ($50,000 + $60,000) / 2 = $55,000
Now, we can compute the ratios:
(a) Current Ratio = Current Assets / Current Liabilities
Current Assets = Cash + Receivables (net) + Inventories = $15,000 + $70,000 + $60,000 = $145,000
Current Liabilities = Accounts Payable = $50,000
Current Ratio = $145,000 / $50,000 = 2.9
(b) Acid-test Ratio = (Current Assets - Inventory) / Current Liabilities
Acid-test Ratio = ($145,000 - $60,000) / $50,000 = 1.7
(c) Receivables Turnover = Net Credit Sales / Average Accounts Receivable
Receivables Turnover = $390,000 / $65,000 = 6.0 times
(d) Inventory Turnover = Cost of Goods Sold / Average Inventory
Inventory Turnover = $198,000 / $55,000 = 3.6 times
Therefore, the computed ratios are:
(a) Current Ratio: 2.9:1
(b) Acid-test Ratio: 1.7:1
(c) Receivables Turnover: 6.0 times
(d) Inventory Turnover: 3.6 times
To compute the requested ratios, we need to use the information provided in the given comparative balance sheet and additional information for 2009. Let's break down each ratio and explain how to calculate it:
(a) Current Ratio:
The current ratio is calculated by dividing current assets by current liabilities. Current assets include cash, receivables (net), and inventories. Current liabilities include accounts payable.
Current ratio = Current assets / Current liabilities
In this case, the current assets are the sum of cash ($15,000), receivables (net) ($70,000), and inventories ($60,000), which equals $145,000. The current liabilities are accounts payable, which is $50,000.
Current ratio = $145,000 / $50,000
Current ratio = 2.9 : 1 (rounded to 1 decimal place)
(b) Acid-Test Ratio:
The acid-test ratio, also called the quick ratio, is a more stringent measure of liquidity than the current ratio. It factors in only the most liquid current assets, excluding inventories from the calculation.
Acid-test ratio = (Cash + Receivables) / Current liabilities
In this case, the cash is $15,000, and the receivables (net) is $70,000. The current liabilities are still $50,000.
Acid-test ratio = ($15,000 + $70,000) / $50,000
Acid-test ratio = 1.7 : 1 (rounded to 1 decimal place)
(c) Receivables Turnover:
The receivables turnover ratio measures how many times a company collects its average accounts receivable during a period. It is calculated by dividing net credit sales by average accounts receivable.
Receivables turnover = Net credit sales / Average accounts receivable
In this case, the net credit sales are calculated by subtracting sales returns and allowances ($20,000) from sales on account ($410,000), resulting in $390,000. The average accounts receivable can be obtained by averaging the accounts receivable for 2008 and 2009.
Receivables turnover = $390,000 / Average accounts receivable
To calculate average accounts receivable, sum up the accounts receivable for 2008 ($60,000) and 2009 ($70,000), and divide by 2:
Average accounts receivable = ($60,000 + $70,000) / 2
Average accounts receivable = $65,000
Receivables turnover = $390,000 / $65,000
Receivables turnover = 6 times
(d) Inventory Turnover:
The inventory turnover ratio measures how many times a company sells and replaces its inventory during a period. It is calculated by dividing the cost of goods sold by the average inventory.
Inventory turnover = Cost of goods sold / Average inventory
In this case, the cost of goods sold is $198,000. The average inventory can be obtained by averaging the inventory for 2008 and 2009.
Inventory turnover = $198,000 / Average inventory
To calculate average inventory, sum up the inventory for 2008 ($50,000) and 2009 ($60,000), and divide by 2:
Average inventory = ($50,000 + $60,000) / 2
Average inventory = $55,000
Inventory turnover = $198,000 / $55,000
Inventory turnover = 3.6 times
So, the computed ratios are as follows:
(a) Current ratio: 2.9 : 1
(b) Acid-test ratio: 1.7 : 1
(c) Receivables turnover: 6 times
(d) Inventory turnover: 3.6 times