Evaluating ratio data

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

Requirements

1. Calculate Abanaki’s acid-test ratio for 2018. (Round to two decimals.) Determine whether Abanaki’s acid-test ratio improved or deteriorated from 2017 to 2018. How does Abanaki’s acid-test ratio compare with the industry average of 0.80?

2. Calculate Abanaki’s accounts receivable turnover ratio. (Round to two decimals.) How does Abanaki’s ratio compare to the industry average accounts receivable turnover of 10?

3. Calculate the days’ sales in receivables for 2018. (Round to the nearest day.) How do the results compare with Abanaki’s credit terms of net 30?

Short Answer

Expert verified
  1. The acid-test ratio is 0.82 on April 30, 2018
  2. The accounts receivable turnover ratio is 11.6 times.
  3. The day sales in receivable are 31 days.

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 cash and cash equivalents. It is also called a Quick Ratio.

02

Step 2:  Calculation of Acid-test ratio

April 30, 2017:

Acid-Test  Ratio=Cash+Short-termInvestment+CurrentReceivablesTotal  Current  Liabilities=$11,000+$14,000+$71000$107,000=0.89

April 30, 2018:

Acid-Test  Ratio=Cash+Short-termInvestment+CurrentReceivablesTotal  Current  Liabilities=$5,000+$25,000+$57,000$105,000=0.82

Abenakis acid-test ratio declined from 2017 to 2018 from 0.89 to 0.82. Although compared with the industry rate of 0.80, Abenakis acid-test ratio is considered good.

03

 Calculation of accounts receivable turnover ratio

Accounts  Turnover  Ratio=Net  Credit  SalesAverage  Net  Accounts  Receivables=$742,400$64,000=11.6  times

Abanaki’shas a Faster collection when it compares with Industry.

04

Calculation of day sales receivables

Day's  Sales  in  Receivables=365  DaysAccounts  ReceivableTurnoverRatio=36511.6=31  Days

Abanaki’slonger collection periodwhen compared with Industry.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

How do the percent-of-receivables and aging-of-receivables methods compute bad debts expense?

At January 1, 2018, Hilltop Flagpoles had Accounts Receivable of \(28,000, and Allowance for Bad Debts had a credit balance of \)3,000. During the year, Hilltop Flagpoles recorded the following:

a. Sales of \(185,000 (\)164,000 on account; \(21,000 for cash). Ignore Cost of Goods Sold.

b. Collections on account, \)135,000.

c. Write-offs of uncollectible receivables, $2,300.

Requirements

1. Journalize Hilltop’s transactions that occurred during 2018. The company uses the allowance method.

2. Post Hilltop’s transactions to the Accounts Receivable and Allowance for Bad Debts T-accounts.

3. Journalize Hilltop’s adjustment to record bad debts expense assuming Hilltop estimates bad debts as 10% of accounts receivable. Post the adjustment to the appropriate T-accounts.

4. Show how Hilltop Flagpoles will report net accounts receivable on its December 31, 2018, balance sheet

During August 2018, Lima Company recorded the following:

• Sales of \(133,300 (\)122,000 on account; \(11,300 for cash). Ignore Cost of Goods Sold.

• Collections on account, \)106,400.

• Write-offs of uncollectible receivables, \(990.

• Recovery of receivable previously written off, \)800.

Requirement:

1. Journalize Lima’s transactions during August 2018, assuming Lima uses the direct write-off method.

2. Journalize Lima’s transactions during August 2018, assuming Lima uses the allowance method

Ensuring internal control over the collection of receivables Consider internal control over receivables collections. What job must be withheld from a company’s credit department in order to safeguard its cash? If the credit department does perform this job, what can a credit department employee do to hurt the company?

Delta Watches completed the following selected transactions during 2018

and 2019:2018

Dec. 31 Estimated that bad debts expense for the year was 2% of credit sales of

\(450,000 and recorded that amount as expense. The company uses the

allowance method.

31 Made the closing entry for bad debts expense.

2019

Jan. 17 Sold merchandise inventory to Mack Smith, \)400, on account. Ignore Cost of

Goods Sold.

Jun. 29 Wrote off Mack Smith’s account as uncollectible after repeated efforts to

collect from him.

Aug. 6 Received \(400 from Mack Smith, along with a letter apologizing for being so

late. Reinstated Smith’s account in full and recorded the cash receipt.

Dec. 31 Made a compound entry to write off the following accounts as uncollectible:

Cam Carter, \)1,400; Mike Venture, \(1,200; and Russell Reeves, \)400.

31 Estimated that bad debts expense for the year was 2% on credit sales of

\(510,000 and recorded the expense.

31 Made the closing entry for bad debts expense.

Requirements

1. Open T-accounts for Allowance for Bad Debts and Bad Debts Expense, assuming

the accounts begin with a zero balance. Record the transactions in the general journal

(omit explanations), and post to the two T-accounts.

2. Assume the December 31, 2019, balance of Accounts Receivable is \)136,000.

Show how net accounts receivable would be reported on the balance sheet at

that date.

See all solutions

Recommended explanations on Business Studies Textbooks

View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free