Q # 1: (Marks: 10) ABC Corporation’s balance sheet at December 31, 2009,shows th
ID: 2662486 • Letter: Q
Question
Q # 1: (Marks: 10) ABC Corporation’s balance sheet at December 31, 2009,shows the following: Current assets Cash= Rs.4,000 Marketable securities= 8,000 Accounts receivables= 100,000 Inventories= 120,000 Prepaid expenses= 1,000 Total current assets= Rs.233,000 Current liabilities Notes payable =Rs.5,000 Accounts payable= 150,000 Accrued expenses= 20,000 Income taxes payable= 1,000 Total current liabilities= Rs.176,000 Long term liabilities= Rs.340,000 Determine the following: 1. Net working capital 2. Current ratio 3. Quick ratio Does ABC Corporation have good or poor liquidity if industryaverage for current ratio is 1.29 and quick ratio is 1.07?Q # 2: (Marks: 10) The XYZ Company reports the following data relative toaccounts receivables: 2009 2008 Average accounts receivables Rs. 400,000 Rs. 416,000 Net credit sales Rs.2,600,000 Rs.3,100,000 The term of sales is net 30 days. 1. Compute the accounts receivables turnover and thecollection period for both years 2. Evaluate the results Q # 1: (Marks: 10) ABC Corporation’s balance sheet at December 31, 2009,shows the following: Current assets Cash= Rs.4,000 Marketable securities= 8,000 Accounts receivables= 100,000 Inventories= 120,000 Prepaid expenses= 1,000 Total current assets= Rs.233,000 Current liabilities Notes payable =Rs.5,000 Accounts payable= 150,000 Accrued expenses= 20,000 Income taxes payable= 1,000 Total current liabilities= Rs.176,000 Long term liabilities= Rs.340,000 Determine the following: 1. Net working capital 2. Current ratio 3. Quick ratio Does ABC Corporation have good or poor liquidity if industryaverage for current ratio is 1.29 and quick ratio is 1.07?
Q # 2: (Marks: 10) The XYZ Company reports the following data relative toaccounts receivables: 2009 2008 Average accounts receivables Rs. 400,000 Rs. 416,000 Net credit sales Rs.2,600,000 Rs.3,100,000 The term of sales is net 30 days. 1. Compute the accounts receivables turnover and thecollection period for both years 2. Evaluate the results
Explanation / Answer
1) Net working capital: A measure of both company’s efficiency and its short-tem financial health. It is calculated as
Net working capital = Total current assets – Total current liabilities
Now substituting the values in the above formula, we get
Net working capital = 233,000 – 176,000
= 57,000
2) Current ratio: An indication of a company’s ability to meet its short-term obligations. It is calculated as
Current ratio = Current assets
Current liabilities
= 233000/176000 = 1.324
3) Quick Ratio: A measure of company’s liquidity and ability to meet its obligations. It is calculated as
Quick ratio = Current assets – Inventories
Current liabilities
= 233000 – 120000
176000
= 0.642
Ø The higher the current ratio the more assurance that current liabilities can be paid. If the ratio is greater than “1” it indicates good short-term financial standing of the company. A ratio of less than “1” indicates that the company is unable to meet its short-term obligations. Hence, the ratio of 1.29 indicates that the industry is performing well in meeting its short-term obligations.
Ø A common rule of thumb is that companies with quick ratio greater than “1” are sufficiently able to meet their short-term obligations. The low quick ratio indicate that the company is over-leveraged, struggling to maintain or grow sales, paying bills too quickly or collecting bills too slowly. Hence, the ratio of 1.07 indicate that the industry is quickly converting its receivables into cash and easily able to cover its financial obligations.
Ø Accounts Receivable turnover: It is an activity ratio, measuring how efficiently a firm uses its assets. It is calculated as
Accounts Receivable turnover = Net credit sales
Average accounts receivables
For the year 2008, ART = 3100000/416000 = 7.452
For the year 2009, ART = 2600000/400000 = 6.5
Collection period = 365/Accounts Receivables turnover
For year 2008, collection period = 365/7.452 = 49days
For year 2009, collection period = 365/6.5 = 56days
2)
Ø A high Accounts receivables ratio indicate that the company operates on a cash-basis or its extension of credit and collection of receivables is efficient. A low ratio indicates that the company should re-assess its credit policies in order to ensure the timely collection of imparted credit that is not earning interest for the firm.
Ø The collection period for the year 20
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