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. 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 the inventory and prepaid expenses. Accounts Receivable Turnover: A measure of ability to collect account receivables, account receivable turnover reports the net credit sales as the times of average account receivables. It reflects the efficiency in account receivable collection. Inventory Turnover: It is a part of liquidity 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. To compute: Four liquidity ratios that are current ratio, acid-test ratio, accounts receivable turnover and inventory turnover at the end of the year for Company N.

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Please explain the solution to this general accounting problem using the correct accounting principles.

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Question

Chapter 18, Problem 18.5E

(a)

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.

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 the inventory and prepaid expenses.

Accounts Receivable Turnover: A measure of ability to collect account receivables, account receivable turnover reports the net credit sales as the times of average account receivables. It reflects the efficiency in account receivable collection.

Inventory Turnover: It is a part of liquidity 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.

To compute: Four liquidity ratios that are current ratio, acid-test ratio, accounts receivable turnover and inventory turnover at the end of the year for Company N.

(b)

To determine

To analyze: The liquidity ratios of N Company with M Company and industry average.

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