6. Gator Corporation currently has a current ratio equal to 0.65. If Gator Corpo
ID: 2766901 • Letter: 6
Question
6. Gator Corporation currently has a current ratio equal to 0.65. If Gator Corporation increases current assets and current liabilities by the same amount, what will happen to their current ratio? a. Increase b. Decrease c. Stay the same d. Change, but more information is required to determine the direction of the change. e. None of the above. 7. On average, a firm sells $2,500,000 in merchandise a month. Its cost of goods sold equals 80 percent of sales, and it keeps inventory equal to one-half of its monthly cost of goods on hand at all times. If the firm analyzes its accounts using a 360-day year, what is the firm's inventory conversion period? a. 360 days b. 180 days c. 30 days d. 15 days e. 10 days 8. You have recently been hired to improve the performance of Multiplex Corporation which has been experiencing a severe cash shortage. As one part of your analysis, you want to determine the firm's cash conversion cycle. Using the following information and a 360-day year, what is your estimate of the firm's current cash conversion cycle? Current inventory = $120,000 Annual sales = $600,000 Accounts receivable = $160,000 Accounts payable = $25,000 Total annual purchases = $360,000 Purchases credit terms: net 30 days Receivables credit terms: net 50 days a. 49 days b. 143 days c. 100 days d. 168 days e. 191 days 9. Jordan Air Inc. has average inventory of $1,000,000. Its estimated annual sales are 15 million and the firm estimates its receivables collection period to be twice as long as its inventory conversion period. The firm pays its trade credit on time; its terms are net 30. The firm wants to decrease its cash conversion cycle by 10 days. It believes that it can reduce its average inventory to $900,000. Assume a 360-day year and that sales will not change. Cost of goods sold equal 80 percent of sales. By how much must the firm also reduce its accounts receivable to meet its goal of a 10-day reduction? a. $101,900 b. $1,000,000 c. $291,667 d. $333,520 e. $0
Explanation / Answer
Answer for question no.6:
Given current ratio = 0.65
Formula for current assets= Current assets/Current liabilites
For example, if current assets= $65,000
Current liabilities =$100,000.
Current ratio =65,000/100,000 =0.65
If current asset are increased by $10,000 and current liabilities by $10,000, then the revised ratio would be $75,000/$110,000
=0.68. So, the current ratio increases.
Answer for question no.7:
Given sales =$2,500,000
Cost of goods sold=80%* $2,500,000 =$2,000,000.
Montly cost of goods sold=$2,000,000/12
=$166,667.
Inventory maintained = one half of the monthly requirement =$166,667/2
=$83,333.
Inventory turnover ratio =$2,000,000/$83,333
=24 times.
Inventory conversion cycle =360 days/24
=15 days. therefore answer is option D.
Answer for question no.8:
Formula for cash conversion cycle=Days inventory outstanding +days sales outstainding- Days payable outstanding.
Days inventory outstainding = 360/Inventory turnover ratio.
Inventory turnover ratio= COGS/Average inventory. =360,000/120,000 =3 times.
Days inventory outstanding =360/3=120 days.
Days receivable outstainding=360/(sales/account receivables)
=360/($600,000/$160,000)
=360/3.75
=96 days.
Days payable outstanding = 360/(Cost of goods sold/Accounts payable)
=360/($360,000/$25,000)
=360/14.4
=25 days.
Substituting the values in the cash conversion cycle
=120+96 -25
=191 days.
Therefore, answer is option e.
Answer for question no.9:
Average inventory =$1,000,000
Annual sales=15,000,000
Cost of goods sold=80%*$15,000,000.
$12,000,000.
Days payable outstainding =30 days.
Days inventory outstanding = 360/(COGS/Average inventory)
=360/(12,000,000/1,000,000)
=360/12
=30 days.
Days receivables outstanding = 2* inventory conversion period
=2*30 =60 days.
Balance in accounts receivables would be =$15,000,000/(360/60)
$2,500,000.
Receivables per day =$2,500,000/60
=$41,667.
CCC=30+60-30 = 60 days.
Revised Inventory conversion period=360/(COGS/Average Inventory)
=360/($12,000,000/900,000)
=360/13.33
=27 days.
If CCC= 50 days, the revised days receivable outstading should be 50-27+30 =53 days.
Therefore, receivables should be reduced by 7 days. Therefore, Account receivable should be reduced by 7*41667
=$291,667.
Therefore answer is option c.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.