
Compute the given ratios for Company C.

Answer to Problem 13.12E
The ratios of Company C are given below:
Ratios determined for Company C | |
Receivable turnover | 8.98 |
Inventory turnover | 10.74 |
2.06 | |
Cash ratio | 0.81 |
Times interest earned | 9.43 |
Cash coverage ratio | 9.35 |
Table (1)
Explanation of Solution
Receivables turnover ratio: Receivables turnover ratio is mainly used to evaluate the collection process efficiency. It helps the company to know the number of times the accounts receivable is collected in a particular time period. This ratio is determined by dividing credit sales and sales return. It is determined by the following formula:
Net credit sales Average net receivables
Inventory turnover ratio: Inventory turnover ratio is one of the Assets Turnover ratios. This ratio is a financial metric used by a company to quantify the number of times inventory is used or sold during the accounting period. It is calculated as follows:
Cost of goods soldAverage inventory
Current ratio: Current ratio is one of the
Current assetsCurrent liabilities
Cash ratio: This ratio is used to measure the adequacy of the cash in the business. It is determined by dividing cash and cash euqivalents and current liabilities. It is determined by the following formula:
Cash and cash equivalentsCurrent liabilities
Times interest earned ratio: Times interest earned ratio quantifies the number of times the earnings before interest and taxes can pay the interest expense. First, determine the sum of income before income tax and interest expense. Then, divide the sum by interest expense. It is determined by the following formula:
Net income+Interest expense+Tax expenseInterest expense
Cash coverage ratio: This ratio indicates the relationship between the
Cash coverage ratio =Cash flows from operating activities Interest paid
Determine the given ratios for Company C:
Ratio | Formula | Calculation | Result |
Receivable turnover | Net credit sales Average net receivables | $4,552$506.5(1) | 8.98 |
Inventory turnover | Cost of goods soldAverage inventory | $2,637$245.5(2) | 10.74 |
Current ratio | Current assetsCurrent liabilities | $1,298(3)$630(4) | 2.06 |
Cash ratio | Cash and cash equivalentsCurrent liabilities | $513$630(4) | 0.81 |
Times interest earned | Net income+Interest expense+Tax expenseInterest expense | $374+$72+$233$72 | 9.43 |
Cash coverage ratio | Cash flows from operating activities Interest paid | $608$65 | 9.35 |
Table (2)
Working Note:
Determine the amount of average net receivables.
Average net receivables=(Ending accounts receivable)+(Beginning accounts receivable)2=$508+$5052=$506.5 (1)
Determine the amount of average inventory.
Average net receivables=(Ending inventory)+(Beginning inventory)2=$251+$2402=$245.5 (2)
Determine the amount of current assets.
Current assets=(Cash and equivalents)+(Marketable securities)+(Accounts receivable)+(Inventories)+(Prepaid expense and other current assets)=$513+$0+$508+$251+$26=$1,298 (3)
Determine the amount of current liabilities.
Current liabilities=(Accounts payable)+(Current accrued expenses)+(Current portion oflong term debt)+(Other currrent liabilities)=$150+$377+$1+$102=$630 (4)
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