Q18E - Horngren'S Financial And Managerial Accounting

Question

The financial statements of Valerie’s Natural Foods include the following items:

Compute the following ratios for the current year:

1. Current ratio

2. Cash ratio

3. Acid-test ratio

4. Inventory turnover

5. Day’s sales in inventory

6. Day’s sales in receivables

7. Gross profit percentage

Step-by-Step Solution

Answer

Answer

1. CR= 1.40:1

2. Cash Ratio = 0.26:1

3. Acid Test Ratio= 0.70:1

4. Inventory Turnover Ratio= 4.10 times

5. Days sales in Inventory= 89 days

6. Days sales in receivables= 58 days

7. Gross Profit % =34.45%

Step 1: Current Ratio

Current Ratio = Current Assets/Current Liabilities

= $190,000/136,000

= 1.40:1

Step 2: Cash Ratio

Cash Ratio= Cash & Cash Equivalent /Current Liabilities

Cash & Cash Equivalent  = Cash + Short term investment 

=$16,000+ $19,000

 = $35,000/$136,000

 Cash Ratio =0.26:1

Step 3: Acid Test Ratio

Acid Test Ratio = Quick Assets/Current liabilities

Quick Assets: Total Current Assets- Prepaid Exp- Inventory

Quick Assets =$190,000 -$ 78,000 - $17,000

                         = $95,000

Acid Test Ratio = $95,000 / $136,000 

Acid Test Ratio =0.70:1

Step 4: Inventory Turnover Ratio

Inventory Turnover Ratio= Cost of Goods Sold/ Average Inventory.

Average Inventory = Beginning Inventory + Ending Inventory / 2

                                         =$78,000+ $74,000 /2

            Average Inventory=  $76,000

Inventory turnover ratio = $312,000/$76,000

                                        = 4.10 times

Step 5: Days Sales in Inventory

Days Sales in Inventory = No of Days in Year/ Inventory Turnover Ratio

                                        =365 / 4.10 

                                        = 89 days 

Step 6: Days Sales in Receivable

Days Sales in Receivable = (Average Accounts Receivable / Total Credit Sales) x 365

Average Accounts Received = $60,000 + $92,000 / 2 

                                                     = $76,000

 Days Sales In Received = $76,000/ $476,000 x365

 Days Sales In Received = 58 days 

Gross Profit Percentage = (Gross Profit / Net Sales) x 100

Gross Profit = Sales- Cost of Goods Sold

= ($476.000 - $312,000)/$476,000 

= 34.45 %