Chapter 8: Q5TI (page 458)

Lovett Company reported the following selected items at March 31, 2018 (last year’s—2017—amounts also given as needed):
Accounts Payable $ 128,000 Accounts Receivable, net:
Cash 104,000 March 31, 2018 $ 108,000
Merchandise Inventory: March 31, 2017 68,000
March 31, 2018 116,000 Cost of Goods Sold 460,000
March 31, 2017 80,000 Short-term Investments 56,000
Net Credit Sales Revenue 1,168,000 Other Current Assets 48,000
Long-term Assets 168,000 Other Current Liabilities 72,000
Long-term Liabilities 52,000
14. Compute Lovett’s (a) acid-test ratio, (b) accounts receivable turnover ratio, and (c) days’ sales in receivables as of
March 31, 2018.

Short Answer

Expert verified

a). The acid-test ratio of the company is 1.34:1

b). The accounts receivable turnover ratio is 13.3 times.

c). The days’ sales receivable is 27.44 days.

Step by step solution

Meaning of Ratios

Ratios are a financial tool used to calculate the relationship among different line items of the financial statements.

Calculation of acid test ratio

$\begin{matrix} Acid - test ratio = \frac{(Cash + Short - terminvestments + Netcurrentreceivables)}{Current Liabilities} \\ = \frac{$ 104, 000 + $ 56, 000 + $ 108, 000}{$ 72, 000 + $ 128, 000} \\ = \frac{$ 268, 000}{$ 200, 000} \\ = 1.34 \end{matrix}$

Step 3:Calculation of account receivable turnover ratio

$\begin{matrix} Accounts receivable turnover ratio = \frac{Net credit sales}{Average accounts receivable} \\ = \frac{$ 1, 168, 000}{$ 88, 000} \\ = 13 .3 \end{matrix}$

Working note:

Calculation of average accounts receivable

$\begin{matrix} A v e r a g e a c c o u n t s r e c e i v a b l e = \frac{O p e n i n g a c c o u n t s r e c e i v a b l e + C l o s i n g a c c o u n t s r e c e i v a b l e}{2} \\ = \frac{$ 68, 000 + $ 1, 08, 000}{2} \\ = $ 88, 000 \end{matrix}$

Step 4:Calculation of day sales receivables

$\begin{matrix} Day sales receivable = \frac{365}{Accounts receivable turnover ratio} \\ = \frac{365}{13 .3} \\ = 27 .44 days \end{matrix}$

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Age of Accounts
	1–30 Days	31–60 Days	61–90 Days	Over 90 Days
Accounts Receivable	\( 65,000	\) 50,000	\(40,000	\)45,000
Estimated percent uncollectible	0.4%	3.0%	5.0%	48.0%

2018
May 6	Recorded credit sales of \(102,000. Ignore Cost of Goods Sold.
Jul. 1	Loaned \)18,000 to Jerry Paul, an executive with the company, on a one-year, 7% note
Dec. 31	Accrued interest revenue on the Paul note
2019
Jul. 1	Collected the maturity value of the Paul note

Short Answer

Step by step solution

Meaning of Ratios

Calculation of acid test ratio

Step 3:Calculation of account receivable turnover ratio

Step 4:Calculation of day sales receivables

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