I already made this equations: Liquidity Current Ratio current assets = 19,797 =
ID: 2435842 • Letter: I
Question
I already made this equations:
Liquidity
Current Ratio
current assets = 19,797 = 1.62 : 1 54,685 = .86 : 1
current liabilities 12,229 63,456
Receivables Turnover (including converting to Average Collection Period)
Net Cr. Sales = 69,654 = 8.82 times = 408,748
Avg. Net Receivable (82045787) / 2 41 days 3,544.80
(Belted) / 2
Inventory Turnover (including converting to Days in Inventory)
COGS = 48,356 = (6.87 times) = 312,645 = 8.26 times
(belted) / 2
Selected Fnancial Information of Reflect Corporation and Tranquility, Inc.
= 115.32 times
(3.2 days)
Instructions:
Utilizing the results of the above ratio calculations for Reflect Corporation and Tranquility, Inc., respectively, complete the following:
Evaluate and compare in detail the companies’ liquidity.
I already made this equations:
Liquidity
Current Ratio
current assets = 19,797 = 1.62 : 1 54,685 = .86 : 1
current liabilities 12,229 63,456
Receivables Turnover (including converting to Average Collection Period)
Net Cr. Sales = 69,654 = 8.82 times = 408,748
Avg. Net Receivable (82045787) / 2 41 days 3,544.80
(Belted) / 2
Inventory Turnover (including converting to Days in Inventory)
COGS = 48,356 = (6.87 times) = 312,645 = 8.26 times
Avg. Inv. 7736 (53 days) 37,832 (44 days)(belted) / 2
Selected Fnancial Information of Reflect Corporation and Tranquility, Inc.
= 115.32 times
(3.2 days)
(In Millions)
Reflect Corporation
Tranquility, Inc.
Income Statements For the Year Ended Dec 31, 2010 Net Sales (all credit sales) $69,654
$408,748 - Cost of Goods Sold 48,356
312,645 Gross Profit 21,298
96,103 - Selling and administrative expenses 17,820
77,932 + Other income (expense) 2,086
4,700 Income before income taxes and interest expense 5,564
22,871 - Interest expense 712
1,978 - Income tax expense 1,954
7,599 Net income $2,898
$13,294
Balance Sheets as of Dec 31, 2009 (2010 beg balances) Assets:
Current assets:
Cash $3,469
$1,678 Account receivable 8,200
3,600 Inventory 7,076
37,112 Total current assets 18,745
42,390 Total noncurrent assets 23,458
124,565 Total assets $42,203
$166,955
Liabilities & Equity:
Current liabilities 11,467
61,569 Total noncurrent liabilities 11,659
41,652 Total liabilities 23,126
103,221 Total stockholders' equity 19,077
63,734 Total liabilities & stockholders' equity $42,203
$166,955
Balance Sheets as of Dec 31, 2010 (2010 end balances) Assets:
Current assets:
Cash $5,214
$12,644 Account receivable 7,587
3,489 Inventory 6,996
38,552 Total current assets 19,797
54,685 Total noncurrent assets 27,867
121,518 Total assets $47,664
$176,203
Liabilities & Equity:
Current liabilities 12,229
63,456 Total noncurrent liabilities 18,793
41,652 Total liabilities 31,022
105,108 Total stockholders' equity 16,642
71,095 Total liabilities & stockholders' equity $47,664
$176,203
IMPORTANT NOTE: When a ratio formula involves a balance sheet account,
such as current assets, use the balance as of the end of the year. If the
formula specifically asks for an average, add the beginning and ending balances
and divide by two.
Explanation / Answer
If we look at current ratio, we will find that it is improved from year 2009 (0.86) to 2010 (1.62). This is the total liquidity measure of the firm, but if we try to find out quick ratio, which from investor's mind is more reliable for them, then we can say something more about firm's liquidity: 2010 (Reflect Corporation): Quick or (Acid-Test ratio) = (Current assets - Inventory) / Current liabilities Quick or (Acid-Test ratio) = ($19,797 - 6,996) / 12,229 = 1.046774 or 104.68% 2010 (Tranquility, Inc.): Quick or (Acid-Test ratio) = (Current assets - Inventory) / Current liabilities Quick or (Acid-Test ratio) = ($54,685 - 38,552) / 63,456 = 0.254239 or 25.42% From the quick ratio, it comes to know that, Reflect Corporation is going well as compared to Tranquility, Inc., as we find that Tranquility, Inc. has high amount of inventories, and inventories means a direct risk attached to company, as this is the most illiquid item of current assets, and also if the inventory is perishable item (e.g. food), then it might spoils after some time, and hence a loss. If we look at current ratio, from that we also can say that Reflect Corporation has sufficient current assets to run operations of the products manufacturing, while Tranquility, Inc. has also sufficient amount, but less than Reflect Corporation's amount.
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