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Liquidity Ratios

The document provides the balance sheet and income statement for Anne Elizabeth Company for 2012 and 2011. It asks to calculate various liquidity ratios for 2012, including: 1) Accounts receivable turnover of 11.05, indicating it collects receivables almost 12 times per year. 2) Merchandise inventory turnover of 7.25, meaning inventory is sold almost 7 times per year. 3) A current ratio of 4.66, showing it has nearly 5 times more current assets than current liabilities, and an acid-test ratio of 2.71, meaning it has almost 3 times more quick assets than current liabilities. 4) Sales to working capital is 4.54, suggesting

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358 views

Liquidity Ratios

The document provides the balance sheet and income statement for Anne Elizabeth Company for 2012 and 2011. It asks to calculate various liquidity ratios for 2012, including: 1) Accounts receivable turnover of 11.05, indicating it collects receivables almost 12 times per year. 2) Merchandise inventory turnover of 7.25, meaning inventory is sold almost 7 times per year. 3) A current ratio of 4.66, showing it has nearly 5 times more current assets than current liabilities, and an acid-test ratio of 2.71, meaning it has almost 3 times more quick assets than current liabilities. 4) Sales to working capital is 4.54, suggesting

Uploaded by

Mckenzie Palaganas
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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FM-TREASURY MAANGEMENT

Activity No.4 – Liquidity Ratios

Problem:
Anne Elizabeth Company's Balance Sheet for December 31, 2012, and Income Statement For the Year
Ended December 31, 2012, are given below.

Balance Sheet
Anne Elizabeth Company
December 31, 2012

2012 2011
Assets:
Current Assets:
Cash $ 50,450 $ 28,538
Marketable Securities 25,000 20,500
Accounts Receivable, less allowance of $10,000 60,000 50,000
Inventory, LIFO 90,000 70,000
Prepaid 8,000 7,000
Total Current Assets 233,450 176,038

Property, Plant, and Equipment:


Land 9,000 8,000
Buildings and Equipment 220,000 210,000
229,000 218,000
Less Accumulated Depreciation (68,000) (60,000)
Total Assets $394,450 $334,038

Liabilities and Shareholders' Equity:


Current Liabilities:
Accounts Payable $ 35,000 $ 30,000
Accrued Compensation 8,000 7,000
Income Taxes 7,000 6,000
Total Current Liabilities 50,000 43,000

Long-Term Debt 40,000 11,038

Shareholders' Equity:
Common Shares 60,000 60,000
Retained Earnings 244,450 220,000
304,450 280,000
Total Liabilities and Shareholders' Equity $394,450 $334,038
Income Statement
Anne Elizabeth Company
For the Year Ended December 31, 2012

2012 2011 2010


Net sales $718,500 $650,500 $640,000
Cost of goods sold 580,000 520,000 515,000
Gross profit 138,500 130,500 125,000

Operating expenses:
Selling, general, and administrative $ 71,000 $ 67,000 $ 65,000
Interest 4,000 3,000 2,500
75,000 70,000 67,500
Earnings before income taxes 63,500 60,500 57,500
Income taxes 30,000 29,000 28,000
Net earnings $ 33,500 $ 31,500 $ 29,500

Required:
Compute the following ratios for 2012:
a. Accounts receivable turnover
b. Merchandise inventory turnover
c. Working capital
d. Current ratio
e. Acid-test ratio (conservative)
f. Sales to working capital

Answers: Show your Solutions

Net Sales
a. Accounts receivable turnover =
Average Gross Receivable
$ 718 , 500
= [ ( $ 60,000+10,000 ) + ( $ 50,000+10,000 ) ]
2
= $718, 500 / 65, 000
= 11. 05

b. Merchandise inventory turnover = Cost of Goods Sold / Average Inventory


( 70 ,000+ 90 , 000 )
= $580, 000 / ( )
2
= $580, 000 / 80, 000
= 7. 25

c. Working Capital = Current Asset – Current Liability


= $233, 450 – 50, 000
= $183, 450

d. Current Ratio = Current Asset / Current Liability


= $233, 450 / 50, 000
= 4.66 or 4.67

(Cash Equivalent + Marketable Securities+ Net Receivable)


e. Acid-test ratio (conservative) =
Current Liability
( $ 50 , 450+25 , 000+60 , 000)
=
50 ,000
135 , 450
=
50 , 000
= 2. 709 or 2.71
Sales
f. Sales to working capital =
Average WorkingCapital
$ 718 ,500
= [ ( $ 233 , 450−50,000 )+ ( $ 176,038−43 , 000 ) ]
2
$ 718,500
=
$ 158 , 244
= 4.54

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