Concept explainers
Concept Introduction:
Ratio Analysis:
Ratio analysis is a study of several key metrics of a company based on the data presented in its' financial statements with an objective to evaluate the financial health of a company.
It is essential for investors, stakeholders, government bodies etc. to evaluate the key metrics of an entity in order to ensure that the company fulfills the going concern principle and displays financial stability.
Current assets are assets that are convertible to cash within a period of one year or less. Current liabilities are liabilities that need to be discharged within a period of one year or less.
Inventory turnover − A measure of the relation between the turnover and inventory measured in number of times.
It seeks to measure the relation of the inventory rolled over in proportion to the total turnover and is an indicator of how much of the inventory is fast moving in relation to the total turnover.
Days Sale in Inventory − A measure of the total outstanding collections for credit sales in terms of inventory.
It is calculated to understand how many days sales in terms of inventory are available to the company.
Methods of
Some of the inventory valuation methods are as follows:
FIFO: Stands for First In First Out. Under this method of inventory valuation, the costs to be assigned to ending inventories are, the costs of the goods first purchased, i.e. the company assigns the closing inventory costs at the costs of the first purchase, since the goods purchased first are assumed to be sold first.
LIFO: Stands for Last In First Out. Under this method of inventory valuation, the costs to be assigned to ending inventories are, the costs of the goods last purchased, i.e. the company assigns the closing inventory costs at the costs of the last purchase, since the goods purchased first are assumed to be sold first.
Requirement 1:
Current Ratio, Inventory Turnover Ratio and Days Sale in Inventory in Year 2
Concept Introduction:
Ratio Analysis:
Ratio analysis is a study of several key metrics of a company based on the data presented in its' financial statements with an objective to evaluate the financial health of a company.
It is essential for investors, stakeholders, government bodies etc. to evaluate the key metrics of an entity in order to ensure that the company fulfills the going concern principle and displays financial stability.
Current Ratio − It is a measure of the relation between the current assets and current liabilities and seeks to measure the ability of the business to fulfill its short term obligations.
Current assets are assets that are convertible to cash within a period of one year or less. Current liabilities are liabilities that need to be discharged within a period of one year or less.
Inventory turnover − A measure of the relation between the turnover and inventory measured in number of times.
It seeks to measure the relation of the inventory rolled over in proportion to the total turnover and is an indicator of how much of the inventory is fast moving in relation to the total turnover.
Days Sale in Inventory − A measure of the total outstanding collections for credit sales in terms of inventory.
It is calculated to understand how many days sales in terms of inventory are available to the company.
Methods of Inventory Valuation:
Some of the inventory valuation methods are as follows:
FIFO: Stands for First In First Out. Under this method of inventory valuation, the costs to be assigned to ending inventories are, the costs of the goods first purchased, i.e. the company assigns the closing inventory costs at the costs of the first purchase, since the goods purchased first are assumed to be sold first.
LIFO: Stands for Last In First Out. Under this method of inventory valuation, the costs to be assigned to ending inventories are, the costs of the goods last purchased, i.e. the company assigns the closing inventory costs at the costs of the last purchase, since the goods purchased first are assumed to be sold first.
Requirement 2:
Comment on Current Ratio, Inventory Turnover Ratio and Days Sale in Inventory in Year 2
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Chapter 6 Solutions
FUNDAMENTAL ACCT PRIN CONNECT ACCESS
- The following data were selected from the records of Fluwars Company for the year ended December 31, current year: Balances at January 1, current year: Accounts receivable (various customers) $ 111,500 Allowance for doubtful accounts 11,200 The company sold merchandise for cash and on open account with credit terms 1/10, n/30, without a right of return. The following transactions occurred during the current year: Sold merchandise for cash, $252,000. Sold merchandise to Abbey Corp; invoice amount, $36,000. Sold merchandise to Brown Company; invoice amount, $47,600. Abbey paid the invoice in (b) within the discount period. Sold merchandise to Cavendish Inc.; invoice amount, $50,000. Collected $113,100 cash from customers for credit sales made during the year, all within the discount periods. Brown paid its account in full within the discount period. Sold merchandise to Decca Corporation; invoice amount, $42,400. Cavendish paid its account in full after the…arrow_forwardI want the correct answer with accountingarrow_forwardSolve with explanation and accounting questionarrow_forward
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