Chapter 7, Problem 1BTN

1.

To determine

Determine the amount of accounts receivable reported by Incorporation A at September 26, 2015.

Explanation of Solution

Accounts receivable:

Accounts receivable refers to the amounts to be received within a short period from customers upon the sale of goods and services on account. In other words, accounts receivable are amounts customers owe to the business. Accounts receivable is an asset of a business.

Hence, the amount of accounts receivable reported by Incorporation A at September 26, 2015 is $16,849 million.

2.

To determine

Compute the accounts receivable turnover ratio as of September 26, 2015.

Explanation of Solution

Accounts receivable turnover:

Accounts receivable turnover is a liquidity measure of accounts receivable in times, which is calculated by dividing the net credit sales by the average amount of net accounts receivables. In other words, it indicates the number of times the average amount of net accounts receivables collected during a particular period.

Determine the accounts receivable turnover ratio of Incorporation A.

$\begin{array}{c}\text{Accounts}\text{receivable}\text{turnover}=\frac{\text{Net sales}}{\text{Average}\text{net}\text{account}\text{receivable}}\\ =\frac{\text{Net}\text{sales}}{\left(\frac{\begin{array}{l}\text{ Accounts}\text{receivable as of September 26, 2015+}\\ \text{ Accounts}\text{receivable as of September 27, 2014}\end{array}}{2}\right)}\\ =\frac{\$233,715}{\left(\frac{\$16,849+\$17.460}{2}\right)}\\ =13.62\text{ times}\end{array}$

Hence, the accounts receivable turnover ratio of Incorporation A is 13.62 times.

3.

To determine

Determine the number of days that Incorporation A would take to collect its receivables on an average.

Explanation of Solution

Average collection period:

Average collection period indicates the number of days taken by a business to collect its outstanding amount of accounts receivable on an average.

Determine the average collection period of Incorporation A for the year 2015.

$\begin{array}{c}\text{Average collection period =}\frac{\text{Number of days in a year}}{\text{Accounts receivable turnover}}\\ \text{= }\frac{365\text{ days}}{\text{13}\text{.62 times}}\\ =26.80\text{Days}\end{array}$

Hence, the average collection period of Incorporation A for year 2015 is 26.80 days.

4.

To determine

Compute the liquid assets as a percent of current liabilities as of September 26, 2015 and September 27, 2014, and comment on the company’s ability to satisfy its current liabilities as of its fiscal 2015 year-end compared to its fiscal 2014 year-end.

Explanation of Solution

Compute Incorporation A’s liquid assets as a percent of current liabilities as of September 26, 2015.

Particulars	Amount in $ millions
Cash and cash equivalents	$21,120
Short-term marketable securities	$20,481
Receivables	$16,849
Inventory	$2,349
Total liquid assets	$60,799
Divide: Current liabilities	$80,610
Liquid asset to current liabilities	0.754

Hence, Incorporation A’s liquid asset as a percent of current liabilities as of September 26, 2015 is 75.4%.

Compute Incorporation A’s liquid assets as a percent of current liabilities as of September 27, 2014.

Particulars	Amount in $ millions
Cash and cash equivalents	$13,844
Short-term marketable securities	$11,233
Receivables	$17,460
Inventory	$2,111
Total liquid assets	$44,648
Divide: Current liabilities	$63,448
Liquid asset to current liabilities	0.704

Hence, Incorporation A’s liquid asset as a percent of current liabilities as of September 27, 2014 is 70.4%.

Comments:

Current liabilities are the obligations of a business to be paid or liquidated within a period of one year or one operating cycle of the business whichever is earlier. These obligations are usually satisfied using the cash provided from the operating activities and the existing liquid assets. Usually, the benchmark for liquid ratio is 100%.

Incorporation A’s ability to satisfy its current obligations is calculated above using the four liquid assets (Such as cash and cash equivalents, short-term marketable securities, receivables, and inventory) for the fiscal year-end 2015 and 2014.

Liquid asset as a percentage of current liabilities as of September 26, 2015 is 75.4%, which is higher than September 27, 2014 ratio of 70.4%. This shows that Incorporation A do not have much difficulty in satisfying its current liabilities with its liquid assets.

5.

To determine

Identify the criterion which was used by Incorporation A to classify its items as cash equivalents.

Explanation of Solution

Accounting policies of Incorporation A is disclosed on the Note 1 of financial statements. In that note it is described that “All highly liquid investments with maturities of 3 months or less at the date of purchase are classified as cash equivalents”.

6.

To determine

Re-compute requirement 2 and 4 and comment on any changes since September 26, 2015.

Explanation of Solution

Determine the accounts receivable turnover ratio as of September 24, 2016.

$\begin{array}{c}\text{Accounts}\text{receivable}\text{turnover}=\frac{\text{Net sales}}{\text{Average}\text{net}\text{account}\text{receivable}}\\ =\frac{\text{Net}\text{sales}}{\left(\frac{\begin{array}{l}\text{ Accounts}\text{receivable as of September 26, 2015+}\\ \text{ Accounts}\text{receivable as of September 24, 2016}\end{array}}{2}\right)}\\ =\frac{\$215,639}{\left(\frac{\$16,849+\$15,754}{2}\right)}\\ =13.23\text{ times}\end{array}$

Comparison:

Accounts receivable turnover ratio of Incorporation A for the fiscal year-end 2015 and 2016 is 13.62 times and 13.23 times respectively. Number of times the accounts receivables are collected in a year is almost similar for the years. However, it seems to be good, since the benchmark of accounts turnover ratio is 12 times. This shows that Incorporation A’s performance is good in the fiscal year-end of 2016 also.

Compute Incorporation A’s liquid assets as a percent of current liabilities as of September 24, 2016.

Particulars	Amount in $ millions
Cash and cash equivalents	20,484
Short-term marketable securities	46,671
Receivables	15,754
Inventory	2,132
Total liquid assets	$85,041
Divide: Current liabilities	$79,006
Liquid asset to current liabilities	1.076

Hence, Incorporation A’s liquid asset as a percent of current liabilities as of September 24, 2016 is 107.6%.

Comparison:

Incorporation A’s ability to satisfy its current obligations is calculated above using the four liquid assets (Such as cash and cash equivalents, short-term marketable securities, receivables, and inventory) for the fiscal year-end 2015 and 2014.

Liquid asset as a percentage of current liabilities ratio as of September 27, 2016 is 107.6%, which is higher than September 26, 2015 ratio of 75.4%. This shows that Incorporation A’s ability in satisfying its current liabilities with its liquid assets is tremendously increased in 2016 than 2015.