b.
A supplier should prefer selling $25,000 in merchandise on a 30-day open account to Another
World rather than to Imports, Inc. Another World clearly has a greater potential for paying
off this account when it becomes due.
PROBLEM 14.9
A
ANOTHER WORLD AND IMPORTS, INC. (concluded)
Although Imports, Inc., has a larger dollar amount of working capital and a higher current
ratio, Another World has the higher-quality working capital. The quality of working capital
is determined by the nature of the current assets comprising the working capital and the
length of time required to convert these assets into cash. Over half of Another World’s
cash more quickly than Imports, Inc.
Hill Education.
20 Minutes, Easy
a. Common size income statement:
Déco
r
Industry
I
nc.
A
verag
e
Sales
(
net
)
100
%
100
%
Cost of
g
oods sold
Gross
p
rofit on sales
39%
31%
O
p
eratin
g
ex
p
enses:
Sellin
g
15
%
10
%
General and administrativ
e
6
p
g
%
1
2
17%
6%
PROBLEM 14.1B
DECOR, INC.
21%
23%
25 Minutes, Medium
2015 201
4
a. Net sales:
(
$150,000 ÷ .08
)
1,875,000
$
(
$170,000 ÷ .10
)
1,700,000
$
b. Cost of
g
oods sold in dollars:
(
$1,875,000 net sales – $720,000
g
ross
p
rofit
)
1,155,000
$
(
$1,700,000 net sales – $800,000
g
ross
p
rofit
)
900,000
$
(
(
(
$
(
$
(
(
g
$
$
PROBLEM 14.2B
FREE TIME, INC.
g
e.
PROBLEM 14.2B
Favorable and unfavorable trends:
Favorable trends. One favorable trend is the $175,000 increase in net sales, which represented
problems in 2015 stem from the higher cost of merchandise being purchased from the new
supplier, management should consider either raising its selling prices or looking for a less
costly source of supply.
FREE TIME, INC. (concluded)
Hill Education.
15 Minutes, Easy
a. Current assets:
Cash 61,000$
Marketable securitie
s
175,000
Current liabilities:
Notes pa
y
abl
e
85,000$
Accounts pa
y
abl
e
105,000
b.
The company appears to be in a strong position as to short-run debt-paying ability. It has
almost three dollars of current assets for each dollar of current liabilities. Even if some losses
are sustained in the sale of the merchandise on hand or in the collection of the accounts
The current ratio is 2.89 to 1. It is computed by dividing the current assets of $656,000 by the
PROBLEM 14.3B
GLAVEN, INC.
Hill Education.
25 Minutes, Easy
(Dollars in
Millions)
a. Current assets:
Cash 72.4$
Receivables 150.
4
Merchandise inventories 1,400.0
Prepaid expenses 98.0
Total current assets 1,720.8
$
Quick assets:
b. Current ratio:
Current assets (part a) 1,720.8$
Current liabilities 2,500.0
Current ratio ($1,720.8 ÷ $2,500.0) 0.69 to 1
Quick ratio:
Quick assets (part a) 222.8$
$
PROBLEM 14.4B
CHEZO, INC.
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4
c.
d.
PROBLEM 14.4B
CHEZO, INC. (concluded)
No. It is difficult to draw conclusions from only the above ratios. Chezo’s current ratio and
quick ratio are well below “safe” levels, according to traditional rules of thumb. On the other
Due to characteristics of the industry, cheese stores tend to have smaller amounts of current
assets and quick assets than other types of merchandising companies. An inventory of food has
a short shelf life. Therefore, the inventory of a cheese store usually represents sales for a
Hill Education.
35 Minutes, Medium
(Dollars in
Thousands)
a. (1) Quick assets:
(2) Current assets:
Cash 49,630$
Marketable securities (short-term) 65,910
Accounts receivable 25,330
$
Income tax payable 8,500
Total current liabilities 64,700
$
b. (1) Quick ratio:
Quick assets (part a) 140,870$
Current liabilities (part a) 64,700
Quick ratio: ($140,870 ÷ $64,700) 2.18 to 1
(2) Current ratio:
Current assets (part a) 190,720$
(4) Debt ratio:
Total liabilities (given) 90,000$
Total assets (given) 600,000
$
Debt ratio ($90,000 ÷ $600,000) 15
%
PROBLEM 14.5B
SWEET AS SUGAR, INC.
Hill Education.
$
c. (1)
(2)
SWEET AS SUGAR, INC. (concluded)
From the viewpoint of short-term creditors, Sweet as Sugar appears highly liquid. Its
quick and current ratios are well above normal rules of thumb, and the company’s cash
and marketable securities alone are almost twice its current liabilities.
Long-term creditors should feel relatively secure. Not only is the company highly liquid,
but creditors’ claims amount to only 15% of total assets. If Sweet as Sugar were to go out
45 Minutes, Strong
b.
(
1
)
Current ratio:
Current assets:
Cash 35,000$
Accounts receivabl
e
175,000
Inventor
y
225,000
Total current assets 435,000$
Current liabilities 190,000$
Current ratio
(
$435,000 ÷ $190,000
)
2.3 to 1
(
2
)
Quick ratio:
Quick assets:
(
)
Total assets 1,300,000$
Debt ratio
(
$800,000 ÷ $1,300,000
)
61.5
%
d.
(
1
)
Return on assets:
O
p
eratin
g
income:
Net sales 2,400,000$
Less: Cost of
g
oods sold (1,800,000)
O
p
eratin
g
ex
p
ense
s
(495,000)
O
p
eratin
g
income 105,000$
Total assets
(
at
y
ear-end
)
1,300,000$
(
)
y
PROBLEM 14.6B
HAMILTON STORES
Parts a, c, e, and f appear on the following page.
(
)
a.
c.
e.
f. (1)
PROBLEM 14.6B
HAMILTON STORES (concluded)
In the statement of cash flows, amounts are reported on a cash basis, whereas in the income
statement, they are reported under the accrual basis. Apparently $8,000 of the interest
By traditional measures, the company’s current ratio (2.3 to 1) and quick ratio (1.1 to 1)
appear quite adequate. The company also generates a positive cash flow from operating
The 8.1% return on assets is adequate by traditional standards. However, the 4.2% return on
equity is very low. The problem arises because of Hamilton Stores’ relatively large interest
Interest expense of $80,000 on $610,000 of interest-bearing debt indicates an interest rate of
cannot earn a return on assets that is higher than the cost of borrowing, it should not borrow
money.
Long-term creditors do not appear to have a high margin of safety. The debt ratio of
61.5% is high for American industry. Also, debt is continuing to rise. During the current
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