University:
California State University, Northridge
Course:
ACCT 230 | Introduction to Managerial Accounting
Academic year:

2024
Views:

51

Pages:

13
Author:

fiziokrat16l

Chapter 14 “How Well Am I Doing?” Financial Statement Analysis 14-54 Learning Objective 3 Compute and interpret financial ratios that would be useful to a short-term creditor. 14-55 Ratio Analysis – The Short–Term Creditor Short-term creditors, such as suppliers, want to be paid on time. Therefore, they focus on the company’s cash flows and working capital. NORTON CORPORATION 2009 Cash $ 30,000 Accounts receivable, net Beginning of year 17,000 End of year 20,000 Inventory Beginning of year 10,000 End of year 12,000 Total current assets 65,000 Total current liabilities 42,000 Sales on account 494,000 Cost of goods sold 140,000 14-56 Working Capital The excess of current assets over current liabilities is known as working capital. Working capital is not free. It must be financed with longterm debt and equity. 14-57 Working Capital December 31, 2009 Current assets $ Current liabilities Working capital 65,000 (42,000) $ 23,000 14-58 Current Ratio Current Ratio = Current Assets Current Liabilities The current ratio measures a company’s short-term debt paying ability. A declining ratio may be a sign of deteriorating financial condition, or it might result from eliminating obsolete inventories. 14-59 Current Ratio Current Ratio = Current Assets Current Liabilities Current Ratio = $65,000 $42,000 = 1.55 14-60 Acid-Test (Quick) Ratio Acid-Test = Ratio Acid-Test = Ratio Quick Assets Current Liabilities $50,000 $42,000 = 1.19 Quick assets include Cash, Marketable Securities, Accounts Receivable, and current Notes Receivable. This ratio measures a company’s ability to meet obligations without having to liquidate inventory. 14-61 Accounts Receivable Turnover Accounts Receivable Turnover = Sales on Account Average Accounts Receivable Accounts $494,000 = 26.7 times Receivable = ($17,000 + $20,000) ÷ 2 Turnover This ratio measures how many times a company converts its receivables into cash each year. 14-62 Average Collection Period Average Collection = Period Average Collection = Period 365 Days Accounts Receivable Turnover 365 Days 26.7 Times This ratio measures, on average, how many days it takes to collect an account receivable. = 13.67 days 14-63 Inventory Turnover Inventory Turnover = Cost of Goods Sold Average Inventory This ratio measures how many times a company’s inventory has been sold and replaced during the year. If a company’s inventory turnover Is less than its industry average, it either has excessive inventory or the wrong types of inventory. 14-64 Inventory Turnover Inventory Turnover = Inventory Turnover = Cost of Goods Sold Average Inventory $140,000 = 12.73 times ($10,000 + $12,000) ÷ 2 14-65 Average Sale Period Average Sale Period = Average = Sale Period 365 Days Inventory Turnover 365 Days 12.73 Times This ratio measures how many days, on average, it takes to sell the entire inventory. = 28.67 days