Chapter 18: Q8-34PGA (page 1018)

The comparative financial statements of Norfolk Cosmetic Supply for 2018, 2017, and
2016 include the data shown here:
2018 2017 2016
Balance sheet—partial
Current Assets:
Cash
Short-term investments
Accounts Receivable, Net
Merchandise Inventory
Prepaid Expenses
Total Current Assets
Total Current Liabilities
Income statement—partial
Net Sales (all on account)
$ 70,000
140,000
280,000
355,000
70,000
915,000
560,000
5,890,000
$ 60,000
170,000
240,000
330,000
35,000
835,000
630,000
5,130,000
$ 50,000
120,000
260,000
310,000
35,000
775,000
640,000
4,210,000
Requirements
1. Compute these ratios for 2018 and 2017:
a. Acid-test ratio (Round to two decimals.)
b. Accounts receivable turnover (Round to two decimals.)
c. Days’ sales in receivables (Round to the nearest whole day.)
2. Considering each ratio individually, which ratios improved from 2017 to 2018 and
which ratios deteriorated? Is the trend favorable or unfavorable for the company?

Short Answer

Expert verified

Answer:

(1) The ratios are calculated as follows:

Ratios	Year 2017	Year 2018
Acid-test ratio	0.75	0.88
Accounts receivable turnover	20.52	22.65
Accounts receivable turnover	18 Days	16 Days

(2) All the company’s ratios are improved, which is a good trend.

Step by step solution

Definition of the acid-test ratio

Acid-test ratio is the ratio that calculates the ability of the company to pay its current liabilities.

Ratio for 2018

Acid-test Ratio- $A c i d - t e s t R a t i o = \frac{Q u i c k A s s e t}{C u r r e n t L i a b i l i t i e s} = \frac{$ 490, 000}{$ 56, 000} = 0.85$

Accounts receivable turnover: $A c c o u n t R e c e i v a b l e T u r n o v e r = \frac{S a l e s}{A v e r a g e A c c o u n t R e c e i v a b l e} = \frac{$ 5, 890, 00}{(\frac{$ 240, 600 + $ 280, 000}{2})}$

Day’s Sale $P a y s S c a l e = \frac{365}{A c c o u n t R e c e i v a b l e T u r n o v e r R a t i o} = \frac{365}{20.65} = 16 d a y s$

Ratios for 2017

Acid-test Ratio $A c i d - T e s t R a t i o = \frac{Q u i c k R e s t}{C u r r e n t L i a b i l i t i e s} = \frac{$ 470, 000}{$ 630, 000} = 0.75$

Accounts receivable turnover: $A c c o u n t R e c e i v a b l e T u r n o v e r = \frac{S a l e s}{A v e r a g e A c c o u n t s R e c e i v a b l e s} = \frac{$ 5, 130, 000}{(\frac{$ 260, 00 + $ 240, 000}{2})} = 20.52$

Day’s Sale: $D a y' s S c a l e = \frac{365}{A c c o u n t R e c e i v a b l e T u r n o v e r R a t i o} = \frac{365}{20.52} = 18 d a y s$

Analysis of the ratios

Company is able to increase its liquidity from 0.75 to 0.88. In terms of increasing the efficiency of credit and collecting it, the performance has improved from 20.52 to 22.65. Now company is able to collect cash from the accounts receivable within 16 days which is less as compared to 18 days in previous year.

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BILLY’S WORM FARM Production cost report – BROODING DEPARTMENT Month Ended June 30, 2018
		Equivalent units
Units	Physical units	Transferred in	Direct materials	Conversion costs
Units to account for:
Beginning WIP	9,000
Transferred in	21,000
Total units to account for	30,000

Units accounted for:
Completed and transferred out	20,000	20,000	20,000	20,000
Ending WIP	10,000	10,000	6,000	3,600
Total units accounted for	30,000	30,000	26,000	23,600

COSTS		Transferred in	Direct materials	Conversion costs	Total costs
Cost to account for:
Beginning WIP		\)21,000	\(39,940	\)5,020	\(65,960
Cost added during period		46,200	152,460	56,340	255,000
Total cost to account for		67,200	192,400	61,360	320,960
Divided by total EUP		30,000	26,000	23,600
Cost per equivalent units		\)2.24	\(7.40	\)2.60

Costs accounted for:
Completed and transferred out		\(44,800	\)148,000	\(52,000	\)244,800
Ending WIP		22,400	44,400	9,360	76,160
Total costs accounted for		\(67,200	\)192,400	\(61,360	\)320,960

Wages of workers operating the clarification equipment	$20,000
Manufacturing overhead allocated to clarification	24,000
Water	160,000

UNITS
Beginning work-in-process inventory	70 rolls
Transferred in from spinning department during November	550 rolls
Completed during November	480 rolls
Ending work in process inventory (80% complete for conversion work)	140 rolls

COSTS
Beginning work in process inventory (transferred in costs, \(4,000, Materials costs, \)1,400 conversion costs, \(5,300)	\)10,700
Transferred in from the spinning department	23,280
Material costs added during November	14,100
Coversion cost added during November (manufacturing wages, \(8,725; manufacturing overhead allocated, \)43,991)	52,716

Short Answer

Step by step solution

Definition of the acid-test ratio

Ratio for 2018

Ratios for 2017

Analysis of the ratios

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