Question: Silver Clothiers reported the following selected items at April 30, 2018 (last year’s—2017—amounts also given as needed):

Accounts Payable

\( 328,000

Accounts Receivable, net:

Cash

\) 573,720

April 30, 2018

\( 11,000

Merchandise Inventory:

April 30, 2017

\) 165,000

April 30, 2018

\( 250,000

Cost of Goods Sold

\) 1,200,000

April 30, 2017

\( 210,000

Short-term Investments

\) 148,000

Net Credit Sales Revenue

\( 3,212,000

Other Current Assets

\) 100,000

Long-term Assets

\( 350,000

Other Current Liabilities

\) 188,000

Long-term Liabilities

$ 130,000

Compute Silver’s (a) acid-test ratio, (b) accounts receivable turnover ratio, and (c) days’ sales in receivables for the year ending April 30, 2018. Evaluate each ratio value as strong or weak. Silver sells on terms of net 30. (Round days’ sales in receivables to a whole number.)

Short Answer

Expert verified

Answer:

  1. Acid-test ratio is 1.42, Strong
  2. Accounts receivable ratio is 36.5, Strong
  3. Day sales receivable ratio is 10 days, Strong

Step by step solution

01

Definition of acid-test ratio

The acid-test ratio measures the company’s ability to meet its short-term obligations with quick assets. It is also called as Quick Ratio.

02

Step 2:  Calculation of acid-test ratio

Acid-TestRatio=CashIncludingCashEquivalents+Short-termInvestments+NetCurrentReceivablesAccountsPayable+OtherCurrentLiabilities=$573,720+$148,000+$11,000$328,000+$188,000=1.42

03

 Step 3: Calculation of accounts receivable turnover ratio

AccountsReceivableTurnoverRatio=NetCreditSalesAverageNetAccountsReceivables=$3,212,000$11,000+$165,0002=36.5times

04

Calculation of day’s sales in receivables ratio

Day'sSalesReceivables=365DaysAccountsReceivableTurnoverRatio=36536.5=10Days

05

Analysis of ratio

  1. Acid-test ratio is strong, as it exceeds 1, which is good.
  2. Accounts receivable turnover ratio is strong.
  3. Day’s sales in receivables is strong, as business is able to collect cash in 10 days which is less than 30 days credit terms.

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