Below are the Income Statement and Balance Sheet for Palmer Corporation for the years ended 2020 and 2021. Calculate the liquidity ratios in the table to the right for the year ended 2021. Palmer Corporation Comparative Income Statement For the Years Ended December 31, 2021 and 2020 2021 2020 Amount Amount Sales $5,750,900 $4,894,800 Cost of goods sold 3,646,700 3,195,600 Gross profit 2,104,200 1,699,200 Selling expenses 775,500 688,700 Administrative expenses 863,900 815,200 Total operating expenses 1,639,400 1,503,900 Income from operations 464,800 195,300 Other income 102,500 84,600 Income before income tax 567,300 279,900 Income tax expense 200,600 101,200 Net income $366,700 $178,700 Palmer Corporation Comparative Balance Sheet As of December 31, 2021 and 2020 2021 2020 Cash $295,300 $175,200 Accounts receivable, net 890,300 820,700 Inventories 605,900 490,600 Prepaid Expenses 125,200 87,800 Total current assets 1,916,700 1,574,300 Fixed assets, net 1,875,000 1,685,800 Total assets $3,791,700 $3,260,100 Accounts payable $435,300 $408,700 Accrued expenses 315,400 280,600 Other current liabilities 465,700 436,900 Total current liabilities 1,216,400 1,126,200 Long-term debt 1,590,300 1,515,600 Common stock 375,000 375,000 Retained earnings 610,000 243,300 Total liabilities & equity $3,791,700 $3,260,100

Answered: Below are the Income Statement and…

FINANCIAL ACCOUNTING

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ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

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Problem 1Q

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Question

Below are the Income Statement and Balance Sheet for Palmer Corporation
for the years ended 2020 and 2021. Calculate the liquidity ratios in the table to the right
for the year ended 2021.

Palmer Corporation
Comparative Income Statement
For the Years Ended December 31, 2021 and 2020
		2021	2020
		Amount	Amount
	Sales	$5,750,900	$4,894,800
	Cost of goods sold	3,646,700	3,195,600
	Gross profit	2,104,200	1,699,200
	Selling expenses	775,500	688,700
	Administrative expenses	863,900	815,200
	Total operating expenses	1,639,400	1,503,900
	Income from operations	464,800	195,300
	Other income	102,500	84,600
	Income before income tax	567,300	279,900
	Income tax expense	200,600	101,200
	Net income	$366,700	$178,700


Palmer Corporation
Comparative Balance Sheet
As of December 31, 2021 and 2020
		2021	2020
	Cash	$295,300	$175,200
	Accounts receivable, net	890,300	820,700
	Inventories	605,900	490,600
	Prepaid Expenses	125,200	87,800
	Total current assets	1,916,700	1,574,300
	Fixed assets, net	1,875,000	1,685,800
	Total assets	$3,791,700	$3,260,100

	Accounts payable	$435,300	$408,700
	Accrued expenses	315,400	280,600
	Other current liabilities	465,700	436,900
	Total current liabilities	1,216,400	1,126,200
	Long-term debt	1,590,300	1,515,600
	Common stock	375,000	375,000
	Retained earnings	610,000	243,300
	Total liabilities & equity	$3,791,700	$3,260,100

Expert Solution

liquidity ratios

liquidity ratios shows that whether the firm is able to pay off its short term liabilities without raising funds or not.

there are three main liquidity ratios :

1 current ratio ( ideal ratio is 2:1 )

= $\frac{c u r r e n t a s s e t s}{c u r r e n t l i a b i l i t i e s}$

2 acid test ratio / liquid ratio/ quick ratio ( ideal ratio is 1: 1 )

= $\frac{q u i c k a s s e t s}{c u r r e n t l i a b i l i t i e s}$ , (quick assets / liquid assets = current assets - prepaid expense - inventory)

quick assets : 2021 = 1,916,700 - 125,200 - 605,900 = 1,185,600

2022 : 1,574,300 - 87,800 - 490,600 = 995,900

3 cash ratio ( ideal ratio is 0.5 : 1 )

= $\frac{c a s h a n d c a s h e q u i v a l e n t s}{c u r r e n t l i a b i l i t i e s}$

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