Q26E - Horngren'S Financial And Managerial Accounting

Question

Evaluating ratio data

Silver Clothiers reported the following selected items at April 30, 2018 (last year’s—2017—amounts also given as needed):

 

Requirements

1. Calculate Abanaki’s acid-test ratio for 2018. (Round to two decimals.) Determine whether Abanaki’s acid-test ratio improved or deteriorated from 2017 to 2018. How does Abanaki’s acid-test ratio compare with the industry average of 0.80?

2. Calculate Abanaki’s accounts receivable turnover ratio. (Round to two decimals.) How does Abanaki’s ratio compare to the industry average accounts receivable turnover of 10?

3. Calculate the days’ sales in receivables for 2018. (Round to the nearest day.) How do the results compare with Abanaki’s credit terms of net 30?

Step-by-Step Solution

Answer

1. The acid-test ratio is 0.82 on April 30, 2018
2. The accounts receivable turnover ratio is 11.6 times.
3. The day sales in receivable are 31 days.

Step 1: Definition of acid-test ratio

The acid-test ratio measures the company’s ability to meet its short-term obligations with cash and cash equivalents. It is also called a Quick Ratio.

Step 2: Calculation of Acid-test ratio

April 30, 2017:

 $\begin{array}{c}Acid\text{-}TestRatio=\frac{Cash+Short\text{-}termInvestment+C\text{urrent Receivables}}{TotalCurrentLiabilities}\\ =\frac{\$11,000+\$14,000+\$71000}{\$107,000}\\ =0.89\end{array}$

April 30, 2018:

 $\begin{array}{c}Acid\text{-}TestRatio=\frac{Cash+Short\text{-}termInvestment+C\text{urrent Receivables}}{TotalCurrentLiabilities}\\ =\frac{\$5,000+\$25,000+\$57,000}{\$105,000}\\ =0.82\end{array}$

Abenakis acid-test ratio declined from 2017 to 2018 from 0.89 to 0.82. Although compared with the industry rate of 0.80, Abenakis acid-test ratio is considered good.

Step 3: Calculation of accounts receivable turnover ratio

$\begin{array}{c}AccountsTurnoverRatio=\frac{NetCreditSales}{AverageNetAccounts\mathrm{Re}ceivables}\\ =\frac{\$742,400}{\$64,000}\\ =11.6times\end{array}$

Abanaki’shas a Faster collection when it compares with Industry.  

Step 4: Calculation of day sales receivables

$\begin{array}{c}Day\text{'}sSalesin\mathrm{Re}ceivables=\frac{365Days}{Accounts\mathrm{Re}ceivableTurnoverRatio}\\ =\frac{365}{11.6}\\ =31Days\end{array}$

Abanaki’slonger collection periodwhen compared with Industry.