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ACCTG 101 Lecture Notes - Lecture 23: Quick Ratio, Current Liability, Accounts Receivable

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ochrehornet578
14 Sep 2020
School
GCC
Department
Accounting
Course
ACCTG 101
Professor
Margaryan

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Document Summary

Neither working capital nor the current ratio considers the makeup of the current assets. A ratio that measures the instant debt-paying ability of a company is called the quick ratio or acid-test ratio, which is the ratio of the total quick assets to total current liabilities. Quick assets are cash and other current assets that can be quickly converted to cash. Quick assets normally include cash, marketable securities, and receivables. The quick ratio is a more stringent measure of liquidity than the current ratio. Included in grand company"s current assets, the quick assets are cash, marketable securities, and accounts receivables that can generally be converted to cash rather quickly to pay current liabilities. Relevant financial statement data can be used to compute grand company"s quick ratio as follows: The amount and makeup of accounts receivable changes constantly during business operations. Sales on account increase accounts receivable, whereas collections from customers decrease accounts receivable.

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Related Questions

Measures of liquidity, Solvency and Profitability

The comparative financial statements of Marshall Inc. are as follows. The market price of Marshall Inc. common stock was $ 56 on December 31, 20Y2.

Marshall Inc.
Comparative Retained Earnings Statement
For the Years Ended December 31, 20Y2 and 20Y1
20Y2 20Y1
Retained earnings, January 1 $ 1,942,900 $ 1,649,000
Net income 438,000 337,700
Total $ 2,293,300 $ 1,986,700
Dividends
On preferred stock $ 7,000 $ 7,000
On common stock 36,800 36,800
Total dividends $ 43,800 $ 43,800
Retained earnings, December 31 $ 2,337,100 $ 1,942,900


Marshall Inc.
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
20Y2 20Y1
Sales $ 2,609,750 $ 2,404,520
Cost of goods sold 899,360 827,410
Gross profit $ 1,710,390 $ 1,577,110
Selling expenses $ 578,010 $ 708,850
Administrative expenses 492,370 416,310
Total operating expenses 1,070,380 1,125,160
Income from operations $ 640,010 $ 451,950
Other income 33,690 28,850
$ 673,700 $ 480,800
Other expense (interest) 176,000 96,800
Income before income tax $ 497,700 $ 384,000
Income tax expense 59,700 46,300
Net income $ 438,000 $ 337,700


Marshall Inc.
Comparative Balance Sheet
December 31, 20Y2 and 20Y1
Dec. 31, 20Y2 Dec. 31, 20Y1
Assets
Current assets
Cash $ 536,140 $ 416,030
Marketable securities 811,450 689,410
Accounts receivable (net) 489,100 459,900
Inventories 365,000 277,400
Prepaid expenses 101,436 83,210
Total current assets $ 2,303,126 $ 1,925,950
Long-term investments 1,131,364 395,490
Property, plant, and equipment (net) 2,640,000 2,376,000
Total assets $ 6,074,490 $ 4,697,440
Liabilities
Current liabilities $ 677,390 $ 684,540
Long-term liabilities
Mortgage note payable, 8 % $ 990,000 $ 0
Bonds payable, 8 % 1,210,000 1,210,000
Total long-term liabilities $ 2,200,000 $ 1,210,000
Total liabilities $ 2,877,390 $ 1,894,540
Stockholders' Equity
Preferred $ 0.70 stock, $ 40 par $ 400,000 $ 400,000
Common stock, $ 10 par 460,000 460,000
Retained earnings 2,337,100 1,942,900
Total stockholders' equity $ 3,197,100 $ 2,802,900
Total liabilities and stockholders' equity $ 6,074,490 $ 4,697,440

Required:

Determine the following measures for 20Y2, rounding to one decimal place, except for dollar amounts, which should be rounded to the nearest cent. Use the rounded answer of the requirement for subsequent requirement, if required. Assume 365 days a year.

1. Working capital $
2. Current ratio
3. Quick ratio
4. Accounts receivable turnover
5. Number of days' sales in receivables days
6. Inventory turnover
7. Number of days' sales in inventory days
8. Ratio of fixed assets to long-term liabilities
9. Ratio of liabilities to stockholders' equity
10. Times interest earned
11. Asset turnover
12. Return on total assets %
13. Return on stockholders’ equity %
14. Return on common stockholders’ equity %
15. Earnings per share on common stock $
16. Price-earnings ratio
17. Dividends per share of common stock $
18. Dividend yield %

Measures of liquidity, Solvency and Profitability

The comparative financial statements of Marshall Inc. are as follows. The market price of Marshall Inc. common stock was $ 56 on December 31, 20Y2.

Marshall Inc.
Comparative Retained Earnings Statement
For the Years Ended December 31, 20Y2 and 20Y1
20Y2 20Y1
Retained earnings, January 1 $ 1,942,900 $ 1,649,000
Net income 438,000 337,700
Total $ 2,293,300 $ 1,986,700
Dividends
On preferred stock $ 7,000 $ 7,000
On common stock 36,800 36,800
Total dividends $ 43,800 $ 43,800
Retained earnings, December 31 $ 2,337,100 $ 1,942,900
Marshall Inc.
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
20Y2 20Y1
Sales $ 2,609,750 $ 2,404,520
Cost of goods sold 899,360 827,410
Gross profit $ 1,710,390 $ 1,577,110
Selling expenses $ 578,010 $ 708,850
Administrative expenses 492,370 416,310
Total operating expenses 1,070,380 1,125,160
Income from operations $ 640,010 $ 451,950
Other income 33,690 28,850
$ 673,700 $ 480,800
Other expense (interest) 176,000 96,800
Income before income tax $ 497,700 $ 384,000
Income tax expense 59,700 46,300
Net income $ 438,000 $ 337,700
Marshall Inc.
Comparative Balance Sheet
December 31, 20Y2 and 20Y1
Dec. 31, 20Y2 Dec. 31, 20Y1
Assets
Current assets
Cash $ 536,140 $ 416,030
Marketable securities 811,450 689,410
Accounts receivable (net) 489,100 459,900
Inventories 365,000 277,400
Prepaid expenses 101,436 83,210
Total current assets $ 2,303,126 $ 1,925,950
Long-term investments 1,131,364 395,490
Property, plant, and equipment (net) 2,640,000 2,376,000
Total assets $ 6,074,490 $ 4,697,440
Liabilities
Current liabilities $ 677,390 $ 684,540
Long-term liabilities
Mortgage note payable, 8 % $ 990,000 $ 0
Bonds payable, 8 % 1,210,000 1,210,000
Total long-term liabilities $ 2,200,000 $ 1,210,000
Total liabilities $ 2,877,390 $ 1,894,540
Stockholders' Equity
Preferred $ 0.70 stock, $ 40 par $ 400,000 $ 400,000
Common stock, $ 10 par 460,000 460,000
Retained earnings 2,337,100 1,942,900
Total stockholders' equity $ 3,197,100 $ 2,802,900
Total liabilities and stockholders' equity $ 6,074,490 $ 4,697,440

Required:

Determine the following measures for 20Y2, rounding to one decimal place, except for dollar amounts, which should be rounded to the nearest cent. Use the rounded answer of the requirement for subsequent requirement, if required. Assume 365 days a year.

1. Working capital $
2. Current ratio
3. Quick ratio
4. Accounts receivable turnover
5. Number of days' sales in receivables days
6. Inventory turnover
7. Number of days' sales in inventory days
8. Ratio of fixed assets to long-term liabilities
9. Ratio of liabilities to stockholders' equity
10. Times interest earned
11. Asset turnover
12. Return on total assets %
13. Return on stockholders’ equity %
14. Return on common stockholders’ equity %
15. Earnings per share on common stock $
16. Price-earnings ratio
17. Dividends per share of common stock $
18. Dividend yield %

Measures of liquidity, solvency, and profitability

The comparative financial statements of Marshall Inc. are as follows. The market price of Marshall common stock was $82.60 on December 31, 20Y2.

Marshall Inc.
Comparative Retained Earnings Statement
For the Years Ended December 31, 20Y2 and 20Y1
  20Y2 20Y1
Retained earnings, January 1 $3,704,000 $3,264,000
Net income $ 600,000 $ 550,000
Dividends:    
On preferred stock (10,000) (10,000)
On common stock (100,000) (100,000)
Increase in retained earnings $ 490,000 $ 440,000
Retained earnings, December 31 $4,194,000 $3,704,000

  

Marshall Inc.
Comparative Income Statement
For the Years Ended December 31, 20Y2 and 20Y1
  20Y2 20Y1
Sales $ 10,850,000 $10,000,000
Cost of goods sold (6,000,000) (5,450,000)
Gross profit $ 4,850,000 $ 4,550,000
Selling expenses $ (2,170,000) $ (2,000,000)
Administrative expenses (1,627,500) (1,500,000)
Total operating expenses $(3,797,500) $ (3,500,000)
Operating income $ 1,052,500 $ 1,050,000
Other revenue and expense:    
Other revenue 99,500 20,000
Other expense (interest) (132,000) (120,000)
Income before income tax expense $ 1,020,000 $ 950,000
Income tax expense (420,000) (400,000)
Net income $ 600,000 $ 550,000

  

  

Marshall Inc.
Comparative Balance Sheet
December 31, 20Y2 and 20Y1
  20Y2 20Y1
Assets  
Current assets:    
Cash $1,050,000 $ 950,000
Marketable securities 301,000 420,000
Accounts receivable (net) 585,000 500,000
Inventories 420,000 380,000
Prepaid expenses 108,000 20,000
Total current assets $ 2,464,000 $2,270,000
Long-term investments 800,000 800,000
Property, plant, and equipment (net) 5,760,000 5,184,000
Total assets $ 9,024,000 $8,254,000
Liabilities  
Current liabilities $ 880,000 $ 800,000
Long-term liabilities:    
Mortgage note payable, 6% $ 200,000 $ 0
Bonds payable, 4% 3,000,000 3,000,000
Total long-term liabilities $ 3,200,000 $3,000,000
Total liabilities $ 4,080,000 $3,800,000
Stockholders’ Equity  
Preferred 4% stock, $5 par $ 250,000 $ 250,000
Common stock, $5 par 500,000 500,000
Retained earnings 4,194,000 3,704,000
Total stockholders’ equity $ 4,944,000 $4,454,000
Total liabilities and stockholders’ equity $ 9,024,000 $8,254,000

Determine the following measures for 20Y2. Round to one decimal place, including percentages, except for per-share amounts, which should be rounded to the nearest cent.

1. Working Capital $  
2. Current ratio  
3. Quick ratio  
4. Accounts receivable turnover  
5. Number of days’ sales in receivables  
6. Inventory turnover  
7. Number of days’ sales in inventory  
8. Ratio of fixed assets to long-term liabilities  
9. Ratio of liabilities to stockholders’ equity  
10. Times interest earned  
11. Asset turnover  
12. Return on total assets %
13. Return on stockholders’ equity %
14. Return on common stockholders’ equity %
15. Earnings per share on common stock $  
16. Price-earnings ratio  
17. Dividends per share of common stock $  
18. Dividend yield