BUS 320 Study Guide - Final Guide: Current Liability, Accounts Payable, Asset Turnover

50 views1 pages
3.1 Suppose a firm were to pay off some of its suppliers and short-term creditors. what
happens if a firm sells some merchandise?
The first case is a trick question. Suppose the firm has $4 in current assets and $2 in
current liabilities for a current ratio of 2. If we use $1 in cash to reduce current liabilities,
then the new current ratio is (4-1)/ (2-1) =3. If we reverse this to $2 in current assets and $4
in current liabilities, then the current ratio becomes (2-1)/ (4-1) =1/3
The second case, the current ratio would usually rise because inventory is normally shown
at cost and the sales would normally be at something greater than cost. The increase in
either cash or receivables is therefore greater than the decrease in inventory. This increases
current assets and the current ratio rises.
3.2 Payables turnover
Here is a variation on the receivables collection period. How long, on average, does it take
for Prufrock Corporation to pay its bills in 2009?
Account payable= cost of goods sold/ account payable= 1344/344= 3.9 times. So payables
turned over about every 365/344= 94 days. On average then, this company takes 94 days to
3.3 More turnovers
Suppose a company generates $0.4 in sales for every dollar in total assets. How often does
this company turn over its total asset?
The total asset turnover here is 0.4 times per year. It takes 1/0.4= 2.5 years to turn them
over completely.
Unlock document

This preview shows half of the first page of the document.
Unlock all 1 pages and 3 million more documents.

Already have an account? Log in

Get OneClass Grade+

Unlimited access to all notes and study guides.

Grade+All Inclusive
$10 USD/m
You will be charged $120 USD upfront and auto renewed at the end of each cycle. You may cancel anytime under Payment Settings. For more information, see our Terms and Privacy.
Payments are encrypted using 256-bit SSL. Powered by Stripe.