Chapter 17, Problem E17.18E

To determine

Current Ratio: A part of liquidity ratios, current ratio reflects the ability to oblige the short term debts of a company. It is calculated based on the current assets and current liabilities; a company has in an accounting period. A current ratio is a useful tool for analysis of financials of a company.

Cash Ratio: A ratio that reflects the ability to pay current liabilities by cash and cash equivalents is called cash ratio. It is useful to evaluate the cash available as cash is an important factor for day to day operations for any business.

Acid-test Ratio: It is a ratio used to determine a company’s ability to pay back its current liabilities using only liquid assets that are current assets except for the inventory and prepaid expenses. Also known as quick ratio, it is a part of liquidity ratios, used for the evaluation of a company’s liquidity.

Inventory Turnover: It is a part of efficiency ratios used during the process of ratio analysis. It reflects the number of times a company’s inventory is converted into sale during a particular period. The cost of goods sold is divided by average inventory to get the value of inventory turnover.

Days’ Sales in Inventory: This is also a key ratio and determines the number of days a company needs to completely turn its inventory into a sale. Inventory turnover ratio works as input to calculate days’ sales in inventory.

Days’ Sales in Receivables: This ratio is calculated to know the number of days required to collect the payment for credit sales by a company. It is also called average collection period. It reflects the quality of the debtors or accounts receivable a company has. The low value of this ratio reflects that a company is able to convert its credit sale into cash in fewer days.

Gross Profit Percentage: Also known as gross margin percentage, this ratio evaluates the profitability of each dollar of sale. Gross profit is the excess of revenue over the cost of goods sold so companies are very keen to have a higher gross profit percentage. It enables them to cover the operating expenses related to business.

a.

To Compute: The current ratio of company V for the current year.

To determine

b.

To Compute: The cash ratio of company V for the current year.

To determine

c.

To Compute: The acid-test ratio of company V for the current year.

To determine

d.

To Compute: The inventory turnover of company V for the current year.

To determine

e.

To Compute: The days’ sales inventory of company V for the current year.

To determine

f.

To Compute: Days’ sales in receivables of V Company for the current year.

To determine

g.

To Compute: Gross profit percentage of V Company for the current year.