Operating cycle. (Round your intermediate calculations and final answers to 1 de

Question

       

       

       

       

Operating cycle. (Round your intermediate calculations and final answers to 1 decimal place.)

       

. Acid-test ratio. (Round your answer to 2 decimal places.) The financial statements for Castile Products, Inc., are given below Castile Products, Inc. Balance Sheet December 31 Assets Current assets Cash Accounts receivable, net Merchandise inventory Prepaid expenses $ 19,000 210,000 360,000 6,000 Total current assets Property and equipment, net 595,000 890,000 Total assets $1,485,000 Liabilities and Stockholders' Equity Liabilities Current liabilities Bonds payable, 12% $ 270,000 390,000 660,000 $120,000 Total liabilities Stockholders' equity Common stock, $5 par value Retained earnings 705,000 825,000 $1,485,000 Total stockholders' equity Total liabilities and equity Castile Products, Inc. Income Statement For the Year Ended December 31 Sales Cost of goods solo $3,080,000 1,260,000 Gross margin Selling and administrative expenses 1,820,000 610,000 Net operating income Interest expense 1,210,000 46,800 Net income before taxes Income taxes (30%) 1,163,200 348,960 Net income $ 814,240 Account balances at the beginning of the year were: accounts receivable, $230,000; and inventory, $270,000. All sales were on account.

Explanation / Answer

Solution:

Acid-Test Ratio = (Cash + Accounts Receivables)/ Current Liabilities

= (19,000 + 210,000)/ 270,000

= 229,000/ 270,000

= 0.85

Times interest earned ratio = Earnings before interest and income taxes/ Interest expense

= 1,210,000/ 46,800

= 25.85

Average collection period = 365 days/ Accounts receivable turnover

Accounts receivable turnover = Sales on account/ Average accounts receivable

= 3,080,000/ [(210,000 + 230,000)/2]

= 3,080,000/ 220,000

= 14

Average collection period = 365 days/ 14

= 26.1 days

Average sale period = 365 days/ Inventory turnover

Inventory turnover = Cost of goods sold/ Average inventory

= 1,260,000/ [(360,000 + 270,000)/2]

= 1,260,000/ 315,000

= 4

Average sale period = 365 days/ 4

= 91.3 days

Operating cycle = Average collection period + Average sale period

= 26.1 + 91.3

= 117.3 days

Related Questions

Navigate

• Browse (All)
• Browse O
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.