Skip to main content

Business Accounting Horngren's Financial & Managerial Accounting, The Financial Chapters Plus MyAccountingLab with Pearson eText -- Access Card Package (5th Edition)

Financial Ratios: Financial ratios are the metrics used to evaluate the capabilities, profitability, and overall performance of a company. To compute: Key Ratios Given info: Items of balance sheet and income statement a) Answer: Current ratio : Current ratio = Current assets Current liabilities = $ 170 , 000 $ 129 , 000 = 1.32 Explanation: Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1. Formula: Current ratio = Current assets Current liabilities Conclusion: Hence, the current ratio is 1.32:1. b) Answer: Cash ratio Cash ratio = Cash + Cash equivalents Current liabilities = $ 20 , 000 + $ 0 $ 129 , 000 = 0.16 Explanation: Cash ratio is used to assess the extent of the company towards making payment of current liabilities with the cash and cash equivalents. The ideal cash ratio is 1. Formula: Cash ratio = Cash + Cash equivalents Current liabilities Conclusion: Hence, the cash ratio is 0.16:1. c) Answer: Acid-test ratio Acid-test ratio = Quick assets Current liabilities = $ 88 , 000 $ 129 , 000 = 0.68 Explanation: Acid-Test Ratio is the ratio denotes that this ratio is a more rigorous test of solvency than the current ratio. It is determined by dividing quick assets and current liabilities. The acceptable acid-test ratio is 0.90 to 1.00. Use the following formula to determine the acid-test ratio: Acid Ratio = Quick assets Current liabilities Quick Assets are those assets that are most liquid. The examples of quick assets include cash and bank balances, marketable securities, and sundry debtors. Use the following formula to determine the Quick assets: Quick assets = ( Current assets − Inventories − Prepaid expenses ) = $ 170 , 000 − $ 70 , 000 − $ 12 , 000 = $ 88 , 000 Conclusion: Hence, quick ratio is 0.68:1. d) Answer: Inventory turnover ratio Inventory turnover = Cost of goods sold Average merchandise inventory = $ 318 , 000 $ 68 , 000 =4 .67 times Explanation: Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period. Formula: Inventory turnover = Cost of goods sold Average inventory Average inventory is the average of sum of opening and closing inventory balance. It is calculated as follows: Average inventory = Opening balance + Closing balance 2 = $ 66 , 000 + $ 70 , 000 2 = $ 68 , 000 Conclusion: Hence, inventory turnover ratio is 4.67 times. e) Answer: Days’ inventory ratio Days' sales in inventory = 365 days Inventory turnover = 365 days 4 .67 times = 78.15 days Explanation: Days’ in inventory are used to determine number of days a particular company takes to make sales of the inventory available with them. Formula: Days' in inventory = Days in accounting period Inventory turnover Conclusion: Hence, days’ in inventory ratio is 78.15 days. f) Answer: Days’ sales in receivables Days' sales in receivables = Days in accounting period Accounts receivables turnover = 365 days 7.47 = 49 days Explanation: Days’ sales in receivables is used to determine the number of days a particular company takes to collect accounts receivables. Formula: Days' sales in receivables = Days in accounting period Accounts receivables turnover Accounts 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. Accounts receivable turnover ratio is determined by following formula: Accounts receivables turnover ratio } = Net credit sales Average accounts receivables Thus, accounts receivable turnover ratio is Accounts receivables turnover ratio } = Net credit sales Average net accounts receivables = $ 478 , 000 $ 78 , 000 + $ 50 , 000 2 = 7.47 Conclusion: Hence, days’ sales in receivables is 49 days. g) Answer: Gross profit percentage Gross profit percentage = Gross profit Net sales revenue = $ 478 , 000 − $ 318 , 000 $ 478 , 000 = 0.335 Note: Gross profit = Net credit sales – Cost of goods sold Explanation: Gross profit percentage is determined to find out the level of each sales value of dollar that is earned above the expenses made for the cost of goods sold. Formula: Gross profit percentage = Gross profit Net sales revenue Conclusion: Hence, gross profit percentage is 3.35%.

Financial Ratios: Financial ratios are the metrics used to evaluate the capabilities, profitability, and overall performance of a company. To compute: Key Ratios Given info: Items of balance sheet and income statement a) Answer: Current ratio : Current ratio = Current assets Current liabilities = $ 170 , 000 $ 129 , 000 = 1.32 Explanation: Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1. Formula: Current ratio = Current assets Current liabilities Conclusion: Hence, the current ratio is 1.32:1. b) Answer: Cash ratio Cash ratio = Cash + Cash equivalents Current liabilities = $ 20 , 000 + $ 0 $ 129 , 000 = 0.16 Explanation: Cash ratio is used to assess the extent of the company towards making payment of current liabilities with the cash and cash equivalents. The ideal cash ratio is 1. Formula: Cash ratio = Cash + Cash equivalents Current liabilities Conclusion: Hence, the cash ratio is 0.16:1. c) Answer: Acid-test ratio Acid-test ratio = Quick assets Current liabilities = $ 88 , 000 $ 129 , 000 = 0.68 Explanation: Acid-Test Ratio is the ratio denotes that this ratio is a more rigorous test of solvency than the current ratio. It is determined by dividing quick assets and current liabilities. The acceptable acid-test ratio is 0.90 to 1.00. Use the following formula to determine the acid-test ratio: Acid Ratio = Quick assets Current liabilities Quick Assets are those assets that are most liquid. The examples of quick assets include cash and bank balances, marketable securities, and sundry debtors. Use the following formula to determine the Quick assets: Quick assets = ( Current assets − Inventories − Prepaid expenses ) = $ 170 , 000 − $ 70 , 000 − $ 12 , 000 = $ 88 , 000 Conclusion: Hence, quick ratio is 0.68:1. d) Answer: Inventory turnover ratio Inventory turnover = Cost of goods sold Average merchandise inventory = $ 318 , 000 $ 68 , 000 =4 .67 times Explanation: Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period. Formula: Inventory turnover = Cost of goods sold Average inventory Average inventory is the average of sum of opening and closing inventory balance. It is calculated as follows: Average inventory = Opening balance + Closing balance 2 = $ 66 , 000 + $ 70 , 000 2 = $ 68 , 000 Conclusion: Hence, inventory turnover ratio is 4.67 times. e) Answer: Days’ inventory ratio Days' sales in inventory = 365 days Inventory turnover = 365 days 4 .67 times = 78.15 days Explanation: Days’ in inventory are used to determine number of days a particular company takes to make sales of the inventory available with them. Formula: Days' in inventory = Days in accounting period Inventory turnover Conclusion: Hence, days’ in inventory ratio is 78.15 days. f) Answer: Days’ sales in receivables Days' sales in receivables = Days in accounting period Accounts receivables turnover = 365 days 7.47 = 49 days Explanation: Days’ sales in receivables is used to determine the number of days a particular company takes to collect accounts receivables. Formula: Days' sales in receivables = Days in accounting period Accounts receivables turnover Accounts 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. Accounts receivable turnover ratio is determined by following formula: Accounts receivables turnover ratio } = Net credit sales Average accounts receivables Thus, accounts receivable turnover ratio is Accounts receivables turnover ratio } = Net credit sales Average net accounts receivables = $ 478 , 000 $ 78 , 000 + $ 50 , 000 2 = 7.47 Conclusion: Hence, days’ sales in receivables is 49 days. g) Answer: Gross profit percentage Gross profit percentage = Gross profit Net sales revenue = $ 478 , 000 − $ 318 , 000 $ 478 , 000 = 0.335 Note: Gross profit = Net credit sales – Cost of goods sold Explanation: Gross profit percentage is determined to find out the level of each sales value of dollar that is earned above the expenses made for the cost of goods sold. Formula: Gross profit percentage = Gross profit Net sales revenue Conclusion: Hence, gross profit percentage is 3.35%.

Solution Summary: The author explains that financial ratios are the metrics used to evaluate the capabilities, profitability, and overall performance of a company.

Horngren's Financial & Managerial Accounting, The Financial Chapters Plus MyAccountingLab with Pearson eText -- Access Card Package (5th Edition)

Horngren's Financial & Managerial Accounting, The Financial Chapters Plus MyAccountingLab with Pearson eText -- Access Card Package (5th Edition)

5th Edition

ISBN: 9780134077321

Author: Tracie L. Miller-Nobles, Brenda L. Mattison, Ella Mae Matsumura

Publisher: PEARSON

See similar textbooks

Videos

Expert Solution & Answer

Want to see the full answer?

Check out a sample textbook solution

Blurred answer

Chapter 15, Problem 15.19E

Chapter 15, Problem 15.21E

Students have asked these similar questions

Provide Answer

Hello tutor solve this question and accounting answer

General Account - If total assets decreased by $29,000 during a period of time and owner's equity increased by $23,000 during the same period, then the amount and direction (increase or decrease) of the period's change in total liabilities is _.

Chapter 15 Solutions

Horngren's Financial & Managerial Accounting, The Financial Chapters Plus MyAccountingLab with Pearson eText -- Access Card Package (5th Edition)

Ch. 15 - What part of the Libertys annual report is written...Ch. 15 - Horizontal analysis of Liberty's balance sheet for...Ch. 15 - Vertical analysis of Liberty's balance sheet for...Ch. 15 - Which statement best describes Liberty's acid-test...Ch. 15 - Liberty's inventory turnover during 2017 was...Ch. 15 - Prob. 6QC Ch. 15 - Prob. 7QC Ch. 15 - Liberty's rate of return on common stockholders'...Ch. 15 - The company has 2,500 shares of common stock...Ch. 15 - Prob. 10AQC

Ch. 15 - What ate the three main ways to analyze financial...Ch. 15 - What is an annual report? Briefly describe the key...Ch. 15 - Prob. 3RQ Ch. 15 - What is trend analysis, and how does it differ...Ch. 15 - Prob. 5RQ Ch. 15 - Prob. 6RQ Ch. 15 - Prob. 7RQ Ch. 15 - Briefly describe the ratios that can be used to...Ch. 15 - Prob. 9RQ Ch. 15 - Briefly describe the ratios that can be used to...Ch. 15 - Briefly describe the ratios that can be used to...Ch. 15 - Prob. 12RQ Ch. 15 - Prob. 13RQ Ch. 15 - Prob. 14RQ Ch. 15 - Prob. 15RQ Ch. 15 - Prob. 15.1SE Ch. 15 - Performing horizontal analysis McDonald Corp....Ch. 15 - Calculating trend analysis Variline Corp. reported...Ch. 15 - Performing vertical analysis Hoosier Optical...Ch. 15 - Preparing common-size income statement Data for...Ch. 15 - Shine's Companies, a home improvement store chain,...Ch. 15 - Shine's Companies, a home improvement store chain,...Ch. 15 - Shine's Companies, a home improvement store chain,...Ch. 15 - Prob. 15.9SE Ch. 15 - Prob. 15.10SE Ch. 15 - Prob. 15.11SE Ch. 15 - Using ratios to reconstruct a balance sheet...Ch. 15 - Prob. 15.13SE Ch. 15 - Prob. 15.14SE Ch. 15 - Prob. 15.15E Ch. 15 - Computing trend analysis Grand Oaks Realty's net...Ch. 15 - Prob. 15.17E Ch. 15 - Prob. 15.18E Ch. 15 - Prob. 15.19E Ch. 15 - Prob. 15.20E Ch. 15 - Analyzing the ability to pay liabilities Big Bend...Ch. 15 - Analyzing profitability Varsity, Inc.s comparative...Ch. 15 - Prob. 15.23E Ch. 15 - Using ratios to reconstruct a balance sheet The...Ch. 15 - Prob. 15.25E Ch. 15 - Computing earnings per share Falconi Academy...Ch. 15 - Prob. 15.27AP Ch. 15 - Prob. 15.28AP Ch. 15 - Prob. 15.29AP Ch. 15 - Prob. 15.30AP Ch. 15 - Using ratios to evaluate a stock investment...Ch. 15 - Prob. 15.32AP Ch. 15 - Preparing an income statement The following...Ch. 15 - Computing trend analysis and return on common...Ch. 15 - Prob. 15.35BP Ch. 15 - Prob. 15.36BP Ch. 15 - Determining the effects of business transactions...Ch. 15 - Prob. 15.38BP Ch. 15 - Prob. 15.39BP Ch. 15 - Prob. 15.40BP Ch. 15 - Prob. 15.41CP Ch. 15 - Lance Berkman is the controller of Saturn, a dance...Ch. 15 - Prob. 15.1CTEI

Knowledge Booster

Background pattern image

Accounting

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.

Similar questions

SEE MORE QUESTIONS

Recommended textbooks for you

Managerial Accounting: The Cornerstone of Busines...
Accounting
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Cengage Learning
College Accounting, Chapters 1-27
Accounting
ISBN:9781337794756
Author:HEINTZ, James A.
Publisher:Cengage Learning,
College Accounting, Chapters 1-27 (New in Account...
Accounting
ISBN:9781305666160
Author:James A. Heintz, Robert W. Parry
Publisher:Cengage Learning
Managerial Accounting
Accounting
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:South-Western College Pub
Financial Accounting
Accounting
ISBN:9781337272124
Author:Carl Warren, James M. Reeve, Jonathan Duchac
Publisher:Cengage Learning
Financial And Managerial Accounting
Accounting
ISBN:9781337902663
Author:WARREN, Carl S.
Publisher:Cengage Learning,

Text book image

Managerial Accounting: The Cornerstone of Busines...

Accounting

ISBN:9781337115773

Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger

Publisher:Cengage Learning

Text book image

College Accounting, Chapters 1-27

Accounting

ISBN:9781337794756

Author:HEINTZ, James A.

Publisher:Cengage Learning,

Text book image

College Accounting, Chapters 1-27 (New in Account...

Accounting

ISBN:9781305666160

Author:James A. Heintz, Robert W. Parry

Publisher:Cengage Learning

Text book image

Managerial Accounting

Accounting

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:South-Western College Pub

Text book image

Financial Accounting

Accounting

ISBN:9781337272124

Author:Carl Warren, James M. Reeve, Jonathan Duchac

Publisher:Cengage Learning

Text book image

Financial And Managerial Accounting

Accounting

ISBN:9781337902663

Author:WARREN, Carl S.

Publisher:Cengage Learning,

SEE MORE TEXTBOOKS

Financial ratio analysis; Author: The Finance Storyteller;https://www.youtube.com/watch?v=MTq7HuvoGck;License: Standard Youtube License