148
d. Days’ Sales in Receivables:
Gross Receivables
=
$50,000
=
4.56 days
Net Sales/365
$4,000,000/365
e. Days’ Sales in Inventory:
Ending Inventory
=
$400,000
=
Cost of Goods Sold/365
$1,800,000/365
f. The days’ sales in receivables and the days’ sales in inventory are understated based
on the year-end figures because the receivables and inventory numbers are
Anne Elizabeth Corporation is using a natural business year; therefore, at year-end,
the receivables and the inventory are below average for the year.
PROBLEM 6-17
a. First-In, First-Out (FIFO):
Ending Inventory
August 1, Purchase 200 @ $7.00
$1,400
November 1, Purchase 200 @ $7.50
1,500
$2,900
b. Last-In, First-Out (LIFO):
Ending Inventory
149
c. Average Cost (Weighted Average):
Average Cost
=
Total Cost
=
$10,900
=
$6.06
Total Units
1,800
d. Specific Identification:
150
PROBLEM 6-18
a. First-In, First-Out (FIFO):
Ending
Inventory
Cost of Goods Sold
December 10 Purchase
500 x $5.00
$2,500
October 22 Purchase
100 x $4.90
490
$2,990
b. Last-In, First-Out (LIFO):
Ending
Inventory
Cost of Goods Sold
January 1, Beginning Inventory
(600 x $4.00)
$2,400
c. Average Cost (Weighted Average):
Total Cost
=
$20,325
=
$4,619
Total Units
4,400
d. Specific Identification:
July 1 purchase cost $5.00
151
PROBLEM 6-19
a. Sales to Working Capital:
2011
2010
2009
$650,000
=
2.41
$600,000
=
2.31
$500,000
=
2.08
$270,000
$260,000
$240,000
Industry
Average
4.10
4.05
4.00
ratio each year.
PROBLEM 6-20
and after the transactions.
b. 2 This would increase current assets and current liabilities by the same amount.
d. 4 A write-off of inventory would decrease the numerator in the current ratio.
e. 2 The liquidation of a long-term note would reduce the numerator in both the
quick ratio and the current ratio, but it would reduce the numerator of the quick
152
PROBLEM 6-21
a.
2
Cash Equivalents + Marketable Securities + Net Receivables
Current Liabilities
$2,100,000 + 7,200,000 + $50,500,000
=
1.76
$34,000,000
b.
1
The collection of accounts receivable does not change the total
numerator or the denominator of the current ratio formula, nor does the
collection change total current assets or total current liabilities.
PROBLEM 6-22
a.
1
Net Sales
Average Gross Receivables
$1,500,000
=
20.0 times per year
($8,000 + $72,000 + $10,000 + $60,000)/2
b.
2
December 31 represents a date when the accounts receivable would be low
and unrepresentative; thus, the accounts receivable turnover computed on
December 31 will be overstated.
153
PROBLEM 6-23
a.
3
Cash Equivalents + Marketable Securities + Net Receivables
Current Liabilities
$8,000 + $32,000 + $40,000
=
$80,000
=
0.89
$60,000 + $30,000
$90,000
b.
1
Net Sales (use only credit sales when available)/Average Gross Receivables
(only net receivables in this problem)
Net Sales
Average Gross Receivables
Note: Use only credit sales when available.
$600,000
=
$600,000
=
8.00 times
($40,000 + $110,000)/2
$75,000
c.
1
Cost of Goods Sold
Average Inventory
$1,260,000
=
$1,260,000
=
11.45 times
($80,000 + $140,000)/2
$110,000
d.
4
Current Assets
Current Liabilities
$8,000 + $32,000 + $40,000 + $80,000
=
$160,000
=
1.78 times
$60,000 + $30,000
$90,000
e.
2
As long as the current ratio is greater than 1 to 1, any payment will increase
the current ratio because the current liabilities go down more in proportion than
do the current assets.
154
PROBLEM 6-24
a.
1
An increase in inventory would increase the current ratio. To the extent that
the increase in inventory used current funds available, this would decrease the
acid-test.
b.
4
LIFO would result in a lower inventory figure. This would decrease the current
ratio and increase inventory turnover.
c.
3
Current Assets
=
X
=
3.0
Current Liabilities
$600,000
Current Assets – Inventory
=
$1,800,000 – Y
=
2.5
Current Liabilities
$600,000
Cost of Sales
=
$500,000
=
1.67
Inventory
$300,000
d.
2
The most logical reason for the current ratio to be high and the quick ratio low is
that the firm has a large investment in inventory.
e.
5
Low default risk, readily marketable, and a short-term to maturity is a proper
description of investment instruments used to invest temporarily idle cash
balances.
f.
1
A proper management of accounts receivable should achieve a combination of
sales volume, bad debt experience, and receivables turnover that maximizes the
profits of the corporation.
g.
5
Any of the four items could be used to cover payroll expenses.
155
PROBLEM 6-25
a.
1.
Days’ Sales in Receivables
=
Gross Receivables
Net Sales/365
2011:
$131,000 + $1,000
=
54.75 days
$880,000/365
2010:
$128,000 + $900
=
51.70 days
$910,000/365
2009:
$127,000 + $900
=
55.58 days
$840,000/365
2008:
$126,000 + $800
=
56.10 days
$825,000/365
2007:
$125,000 + $1,200
=
56.17 days
$820,000/365
2.
Accounts Receivable Turnover
=
Net Sales
Gross Receivables
2011:
$880,000
=
6.67 times per year
$131,000 + $1,000
2010:
$910,000
=
7.06 times per year
$128,000 + $900
2009:
$840,000
=
6.57 times per year
$127,000 + $900
2008:
$825,000
=
6.51 times per year
$126,000 + $800
2007:
$820,000
=
6.50 times per year
$125,000 + $1,200
156
3.
Accounts Receivable Turnover in Days
=
Gross Receivables
Net Sales/365
2011:
$131,000 + $1,000
=
$880,000/365
2010:
$128,000 + $900
=
51.70 days
$910,000/365
2009:
$127,000 + $900
=
55.58 days
$840,000/365
2008:
$126,000 + $800
=
56.10 days
$825,000/365
2007:
$125,000 + $1,200
=
56.17 days
$820,000/365
4.
Days’ Sales in Inventory
=
Ending Inventory
Cost of Goods Sold/365
2011:
$122,000
=
60.18 days
$740,000/365
2010:
$124,000
=
59.55 days
$760,000/365
2009:
$126,000
=
65.33 days
$704,000/365
2008:
$127,000
=
66.70 days
$695,000/365
2007:
$125,000
=
65.93 days
$692,000/365
157
5.
Inventory Turnover
=
Cost of Goods Sold
Ending Inventory
2011:
$740,000
=
6.07 times per year
$122,000
2010:
$760,000
=
6.13 times per year
$124,000
2009:
$704,000
=
5.59 times per year
$126,000
2008:
$695,000
=
5.47 times per year
$127,000
2007:
$692,000
=
5.54 times per year
$125,000
6.
Inventory Turnover in Days
=
Ending Inventory
Cost of Goods Sold/365
2011:
$122,000
=
60.18 days
$740,000/365
2010:
$124,000
=
59.55 days
$760,000/365
2009:
$126,000
=
65.33 days
$704,000/365
2008:
$127,000
=
66.70 days
$695,000/365
2007:
$125,000
=
65.93 days
$692,000/365