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CHAPTER 6LIQUIDITY OF SHORT-TERM

ASSETS; RELATED DEBT-PAYING ABILITY


MULTIPLE CHOICE
1. Company A uses lifo and Company B uses fifo for inventory valuation. Otherwise, the firms are of
similar size and have the same revenue and expense. Assume inflation. In analyzing liquidity and
profitaility of the two firms, whi!h of the following will hold true"
a
.
It is impossile to !ompare two firms with different inventory methods.

.
Company B will have relatively higher profit and higher inventory turnover.
!
.
Company B will have relatively higher profit and lower inventory turnover.
d
.
Company A will have a higher !urrent ratio and a!id test ratio, with the same profit.
e
.
Company B will have relatively higher profit and a higher !urrent ratio.
A#$% &
'. (hi!h of the following would est indi!ate that the firm is !arrying ex!ess inventory"
a
.
a de!line in sales

.
a de!line in the !urrent ratio
!
.
a de!line in days) sales in inventory
d
.
stale !urrent ratio with de!lining qui!* ratios
e
.
a rise in total asset turnover
A#$% +
,. (hi!h of the following types of usinesses would normally have the shortest operating !y!le"
a
.
a retail !lothing store

.
a gro!ery store
!
.
a wholesale furniture store
d
.
a !ar manufa!turer
e
.
a !ar dealer
A#$% B
-.1
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from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
6. 7ones Company presents the following data for '010.
2e!eivales, less allowan!e for losses and dis!ounts of 81',19- $ 266,700
#et $ales $2,360,108
Cost of :oods $old $1,580,360
3he days) sales in re!eivales is
a
.
;,.1

.
6<.'
!
.
6,.1
d
.
,<.1
e
.
none of the answers are !orre!t
A#$% C
-.'
/ '011 Cengage 1earning. All 2ights 2eserved. 3his edition is intended for use outside of the 4.$. only, with !ontent that may e different
from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
;. Aott Company presents the following data for '010.
2e!eivales, end of year, less allowan!es for losses and dis!ounts of
811;,9-0
$
2,370,100
2e!eivales, eginning of year, less allowan!e for losses and dis!ounts of
810',,,0
$
2,443,140
#et $ales
$24,417,09
0
3he a!!ounts re!eivale turnover in times per year is%
a
.
-.9

.
=.9
!
.
10.=
d
.
9.=
e
.
none of the answers are !orre!t
A#$% +
-. $mith Company presents the following data for '010.
Inventories, eginning of year $ 310,150
Inventories, end of year $ 340,469
Cost of :oods $old $2,103,696
#et $ales $8,690,150
3he numer of days) sales in inventory is%
a
.
-;.<

.
-0.<
!
.
;9.1
d
.
;<.1
e
.
none of the answers are !orre!t
A#$% C
=. $haffer Company presents the following data for '010.
#et $ales, '010 $3,007,124
#et $ales, '009 $ 93,247
Cost of :oods $old, '010 $2,000,326
Cost of :oods $old, '009 $1,000,120
-.,
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from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
Inventory, eginning of '010 $ 341,169
Inventory, end of '010 $ 376,526
3he mer!handise inventory turnover for '010 is%
a
.
;.-

.
1;.-
!
.
=.;
d
.
=.=
e
.
none of the answers are !orre!t
A#$% A
-.6
/ '011 Cengage 1earning. All 2ights 2eserved. 3his edition is intended for use outside of the 4.$. only, with !ontent that may e different
from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
<. $zao Company !omputed the following data for '010.
+ays) sales in re!eivales 38.7 days
A!!ounts re!eivale turnover 9.6 times
A!!ounts re!eivale turnover in days 35.1 days
+ays) sales in inventory 68.5 days
5er!handise inventory turnover 5.9 times
Inventory turnover in days 58.7 days
3he estimated operating !y!le for '010 is%
a
.
9=.6 days

.
10=.' days
!
.
9,.< days
d
.
10<.0 days
e
.
none of the answers are !orre!t
A#$% C
9. 3ypi!ally, whi!h of the following would e !onsidered to e the most indi!ative of a firm)s short.term
det paying aility"
a
.
wor*ing !apital

.
!urrent ratio
!
.
a!id test
d
.
!ash ratio
e
.
days) sales in re!eivales
A#$% B
10. If a firm has pledged its re!eivales and its inventory, then the est indi!ator of its short.term liquidity
may e indi!ated y%
a
.
wor*ing !apital

.
!urrent ratio
!
.
a!id.test
d
.
!ash ratio
e
.
days) sales in re!eivales
A#$% +
-.;
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from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
11. (hi!h of the following would not e !lassified as a !urrent asset"
a
.
!ash

.
mar*etale se!urities
!
.
re!eivales
d
.
inventories
e
.
investments
A#$% &
1'. (hi!h of the following types of usiness would normally have the longest operating !y!le"
a
.
a seller of resort property

.
a !ar dealer
!
.
a !ar manufa!turer
d
.
a gro!ery store
e
.
a re!ord store
A#$% A
1,. (hi!h of the following a!!ounts would not e !lassified as a !urrent asset"
a
.
!ash restri!ted for retirement of onds

.
!ash and equivalents
!
.
!ash and !ertifi!ates of deposit
d
.
time deposits
e
.
!ash
A#$% A
16. 4nrealized losses for long.term investments should usually e reported in the%
a
.
sto!*holders) equity se!tion of the alan!e sheet

.
in!ome statement
!
.
!urrent assets se!tion of the alan!e sheet
d
.
!urrent liailities se!tion of the alan!e sheet
-.-
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from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
e
.
long.term liailities se!tion of the alan!e sheet
A#$% A
1;. (hi!h of the following does not ear on the quality of re!eivales"
a
.
shortening the !redit terms

.
lengthening the !redit terms
!
.
right of return privilege
d
.
lengthening the outstanding period
e
.
all of the answers ear on the quality of re!eivales
A#$% &
1-. (hi!h of the following reasons should not e !onsidered in order to explain why the re!eivales
appear to e anormally high"
a
.
$ales volume expanded materially late in the year.

.
2e!eivales have !olle!tiility prolems and possily some should have een written off.
!
.
3he !ompany seasonally dates invoi!es.
d
.
5aterial amount of re!eivales are on the installment asis.
e
.
$ales volume de!reases materially late in the year.
A#$% &
1=. (hi!h of the following is not an a!!eptale inventory !osting method"
a
.
spe!ifi! identifi!ation

.
last.in, first.out >lifo?
!
.
first.in, first.out >fifo?
d
.
average !ost
e
.
next.in, first.out >nifo?
A#$% &
-.=
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from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
-.<
/ '011 Cengage 1earning. All 2ights 2eserved. 3his edition is intended for use outside of the 4.$. only, with !ontent that may e different
from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
1<. (hi!h of the following would not e a reasonale !on!lusion
when !omparing lifo@fifo under an inflationary !ondition"
a
.
1ifo generally results in a lower profit than does fifo.

.
Aifo reports a higher inventory ending alan!e.
!
.
1ifo results in a lower profit figure than does fifo.
d
.
1ifo would proaly e used for inventory that has a high turnover rate e!ause there
would e an immaterial differen!e in the results etween lifo and fifo.
e
.
3he !ash flow under lifo is greater than the !ash flow under fifo y the differen!e in the
resulting tax etween the two methods.
A#$% +
19. (hi!h of the following !urrent assets will not generate !ash in the future"
a
.
prepayments

.
a!!ounts re!eivale
!
.
inventory
d
.
mar*etale se!urities
e
.
notes re!eivale
A#$% A
'0. (hi!h of the following ratios does not represent some form of !omparison etween a!!ounts in
!urrent assets and a!!ounts in !urrent liailities"
a
.
wor*ing !apital

.
!urrent ratio
!
.
a!id.test ratio
d
.
!ash ratio
e
.
mer!handise inventory turnover
A#$% &
'1. (hi!h of the following ratios would generally e used to evaluate a firm)s overall liquidity position"
a
.
wor*ing !apital

.
!urrent ratio
-.9
/ '011 Cengage 1earning. All 2ights 2eserved. 3his edition is intended for use outside of the 4.$. only, with !ontent that may e different
from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
!
.
a!id.test ratio
d
.
!ash ratio
e
.
inventory turnover in days
A#$% B
TRUE/FALSE
1. Compensating alan!es redu!e the amount of !ash availale to the orrower to meet oligations and
they de!rease the effe!tive interest rate for the orrower.
A#$% A
'. 3o qualify as a mar*etale se!urity, the investment must e readily mar*etale and it must e the intent
of management to !onvert the investment to !ash within the !urrent operating !y!le or a year,
whi!hever is longer.
A#$% 3
,. In terms of liquidity, it is to management)s advantage to show investments under investments instead
of mar*etale se!urities.
A#$% A
6. By reporting mar*etale equity se!urities under !urrent assets, management pi!*s up a liquidity
advantage.
A#$% 3
;. 3he valuation prolem from waiting to !olle!t a re!eivale is ignored in the valuation of re!eivales
and notes that are !lassified as !urrent assets.
A#$% 3
-. 4nder the allowan!e method, the !harge off of a spe!ifi! a!!ount re!eivale does not influen!e the
in!ome statement nor the net re!eivale on the alan!e sheet at the time of the !harge off.
A#$% 3
=. 4sing the dire!t write.off method, the ad det expense is re!orded when a spe!ifi! !ustomer)s a!!ount
is determined to e non!olle!tile.
A#$% 3
-.10
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from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
<. 3he dire!t write.off method frequently results in the ad det
expense eing re!ognized in the year susequent to the sale, and thus results in a proper mat!hing of
expense with revenue.
A#$% A
9. (hen a !ompany has re!eivales that are due eyond one year or a!!ounting !y!le from the alan!e
sheet date, and when it is the industry pra!ti!e to in!lude these re!eivales in !urrent assets, they will
e in!luded in !urrent assets even though they do not te!hni!ally meet the guidelines to qualify as
!urrent assets.
A#$% 3
10. 3he re!eivales of a !ompany with installment re!eivales would normally e !onsidered to e of
higher quality than the re!eivales of a !ompany that did not have installment re!eivales.
A#$% A
11. If days) sales in re!eivales are materially longer than the !redit terms, this indi!ates a !olle!tion
prolem.
A#$% 3
1'. 3he days) sales in re!eivales ratio gives an indi!ation of the length of time that the re!eivales have
een outstanding at the end of the year. 3his indi!ation !an e misleading if sales are seasonal andBor
the !ompany uses a natural usiness year.
A#$% 3
1,. +ays) sales in re!eivales may e anormally high at the end of the year if sales volume expanded
materially late in the year.
A#$% 3
16. +ays) sales in re!eivales may e anormally high if a material amount of sales are on a !ash asis.
A#$% A
1;. (hen doing external analysis, many of the reasons why the days) sales in re!eivales is anormally
high or low !annot e determined without a!!ess to internal information.
A#$% 3
1-. Inventory is parti!ularly sensitive to !hanges in usiness a!tivity. 3herefore, management should *eep
inventory at a minimum.
A#$% A
1=. Be!ause the !ost of spe!ifi! inventory items is not usually pra!ti!al to determine, it is ne!essary for
management to sele!t a !ost flow assumption.
A#$% 3
-.11
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from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
1<. A firm that has een on lifo for many years may have some inventory !osts that go a!* ten years or
more.
A#$% 3
19. 4nder inflationary !onditions, fifo generally results in a lower profit than does lifo, and this differen!e
!an e sustantial.
A#$% A
'0. A low sales to wor*ing !apital ratio tentatively indi!ates an unprofitale use of wor*ing !apital.
A#$% 3
'1. (or*ing !apital of a usiness is the ex!ess of !urrent assets over !urrent liailities.
A#$% 3
''. 3he lifo inventory !osting method usually results in wor*ing !apital eing overstated.
A#$% A
',. 3he lifo inventory !osting method results in the a!id.test ratio eing overstated.
A#$% A
'6. 3he !ash ratio is usually a good indi!ation of the liquidity of the firm.
A#$% A
';. 5anagement should usually strive to *eep the !ash ratio high.
A#$% A
'-. 3he aility of an entity to maintain its short.term, det.paying aility is important to all users of
finan!ial statements.
A#$% 3
'=. &ven an entity on a very profitale !ourse will find itself an*rupt if it fails to meets its oligations to
short.term !reditors.
A#$% 3
'<. Current assets are assets that >1? are in the form of !ash, >'? will e realized in !ash, or >,? !onserve the
use of !ash within the operating !y!le of a usiness or for one year, whi!hever is shorter.
A#$% A
-.1'
/ '011 Cengage 1earning. All 2ights 2eserved. 3his edition is intended for use outside of the 4.$. only, with !ontent that may e different
from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
'9. 3he operating !y!le is the time etween the a!quisition of
inventory and the realization of !ash from selling the inventory.
A#$% 3
,0. In order to !lassify !ash as a !urrent asset, it must e free from any restri!tions that would prevent its
deposit or use to pay !reditors !lassified as long.term.
A#$% A
,1. 3he use of the allowan!e for doutful a!!ounts results in the ad det expense eing !harged to the
period of sale.
A#$% 3
,'. Customer !on!entration !an e an important !onsideration in the quality of re!eivales.
A#$% 3
,,. A shortening of the !redit terms is an indi!ation that there will e more ris* in the !olle!tion of future
re!eivales.
A#$% A
,6. 3he !ompany with the natural usiness year tends to overstate its a!!ounts re!eivale turnover, thus
overstating its liquidity.
A#$% 3
,;. 3he ele!tion to use lifo for taxes governs the firm)s finan!ial reporting.
A#$% 3
,-. If the !ompany !loses the year when the a!tivities are at a pea*, the numer of days) sales in inventory
would tend to e overstated and the liquidity would e overstated.
A#$% A
,=. An approximation of the operating !y!le !an e determined from the re!eivale liquidity figures and
the inventory liquidity figures.
A#$% 3
,<. (or*ing !apital is !onsidered to e more indi!ative of the short.term, det.paying aility than is the
!urrent ratio.
A#$% A
,9. 1iquidity prolems with re!eivales andBor inventory means that the !urrent ratio needs to e mu!h
higher than when there are no su!h liquidity prolems.
-.1,
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from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
A#$% 3
60. $ignifi!ant weight is seldom given to the !ash ratio unless the firm is in finan!ial troule.
A#$% 3
PROBLEMS
1. 2equired%
+etermine the !ost of goods sold of a firm with the finan!ial data given elow%
Current 2atio '.6 to 1
A!id.3est 2atioC '.1 to 1
Current 1iailities 8600,000
Inventory 3urnover >using ending inventory? 6 times
CAssume that the a!id test ratio is !omputed as follows%
Current Assets . Inventory
Current 1iailities
-.16
/ '011 Cengage 1earning. All 2ights 2eserved. 3his edition is intended for use outside of the 4.$. only, with !ontent that may e different
from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
A#$%
Current 2atio D Current Assets D E D '.6
Current 1iailities 8600,000
Current Assets D >8600,000?>'.6? D 89-0,000
A!id.3est 2atio D Current Assets . Inventory D 89-0,000 . E D '.1
Current 1iailities 8600,000
89-0,000 . E D 8<60,000
D 81'0,000
Inventory 3urnover D Cost of :oods $old D E D 6
Inventory 81'0,0
00
Cost of :oods $old D 86<0,000
'. &a!h of the following would generally e thought of as a favorale indi!ator of the firm)s finan!ial
position%
a
.
A !urrent ratio well aove '.0, whi!h is sustantially higher than that for other firms in the
industry.

.
Colle!tion period signifi!antly lower than for several re!ent periods.
!
.
2apidly rising mer!handise inventory turnover.
2equired%
In ea!h !ase, give an example of !ir!umstan!es underlying the ratio that might represent an
unfavorale development.
A#$%
a
.
A high !urrent ratio !an mean oversto!*ed inventory or doutful re!eivales. &ither of these
a!!ounts eing high !ould !ause the !urrent ratio to e misleading.

.
3he firm may have sustantially tightened its !redit poli!y. 3his might have resulted in a
maFor loss of !ustomers.
!
.
2apidly rising turnover might mean that produ!tion is unale to generate goods as qui!*ly
as possile and that the firm is running a ris* of sto!*outs.
-.1;
/ '011 Cengage 1earning. All 2ights 2eserved. 3his edition is intended for use outside of the 4.$. only, with !ontent that may e different
from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
-.1-
/ '011 Cengage 1earning. All 2ights 2eserved. 3his edition is intended for use outside of the 4.$. only, with !ontent that may e different
from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
,. 2equired%
Gow will swit!hing from fifo to lifo for inventory valuation affe!t finan!ial analysis of liquidity and
profitaility" Cite two ratios that will e affe!ted and indi!ate how they will !hange. >Assume an
inflationary !ondition.?
A#$%
1ifo inventory valuation results in higher !ost of sales and lower inventory valuation.
It will !ause lower profitaility and tax outflow. 5er!handise inventory turnover will appear mu!h
higher, sin!e the !ost of sales will e higher and average inventory mu!h lower. +ays) sales in
inventory will e lower, sin!e the !ost of sales will e higher, giving higher daily !ost of sales to divide
into lower inventory. 3he liquidity position will e redu!ed in terms of wor*ing !apital and the !urrent
ratio.
6. +eCort Company)s wor*ing !apital a!!ounts at +e!emer ,1, '009, are given elow%
Current Assets%
Cash $100,000
5ar*etale $e!urities 50,000
A!!ounts 2e!eivale $250,000
1ess Allowan!e for +outful A!!ounts (20,000) 230,000
Inventory, 1ifo 300,000
Hrepaid 8,000
3otal Current Assets $688,000
Current 1iailities%
A!!ounts Hayale $200,000
#otes Hayale 50,000
3axes Hayale 10,000
A!!rued 1iailities 30,000
3otal Current 1iailities $290,000
+uring '010, +eCort Company !ompleted the following transa!tions%
a
.
Hur!hased fixed assets for !ash, 8'0,000.

.
&x!hanged +eCort Company !ommon sto!* for land. &stimated value of transa!tion,
8<0,000.
!
.
Hayment of 860,000 on short.term notes payale.
d
.
$old mar*etale se!urities !osting 8'0,000 for 8';,000 !ash.
e
.
$old +eCort Company !ommon sto!* for 8=0,000.
f. (rote off an a!!ount re!eivale in the amount of 8'0,000.
g
.
+e!lared a !ash dividend in the amount of 8;,000.
h
.
Haid the aove !ash dividend.
i. $old inventory !osting 810,000 for 81;,000 !ash.
-.1=
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from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
F.
$old inventory !osting 8;,000 for 8<,000 on a!!ount.
*
.
Haid a!!ounts payale in the amount of 8'0,000.
l. $old mar*etale se!urities !osting 8'0,000 for 8'0,000 !ash.
m
.
Issued a !redit memo on an a!!ount re!eivale, 81,000.
-.1<
/ '011 Cengage 1earning. All 2ights 2eserved. 3his edition is intended for use outside of the 4.$. only, with !ontent that may e different
from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
2equired%
a
.
Compute the following as of +e!emer ,1, '010%
1
.
wor*ing !apital
'
.
!urrent ratio
,
.
A!id.test ratio >!onservative?
6
.
Cash ratio
>3hese ratios are to e !omputed using only the +e!emer ,1, '010 data.?

.
Aor '011, indi!ate the effe!t of ea!h of the transa!tions given on wor*ing !apital, !urrent
ratio, a!id.test ratio, and !ash ratio. :ive the effe!t in terms of I, . , or none. Consider ea!h
transa!tion to e the first transa!tion of the year. Assume at the start of the year that the
!urrent ratio is over ' to 1, the a!id.test ratio is over 1 to 1, and the !ash ratio is less than 1
to 1.
Aormat%
3he &ffe!t On
A!id.
(or*ing Current 3est Cash
3ransa!tion Capital 2atio 2atio 2atio
A#$%
a
.
1. (or*ing Capital D Current Assets . Current 1iailities
D 8-<<,000 . 8'90,000
D 8,9<,000
Current
Assets
'. Current
2atio
D Current
1iailities
D 8-<<,000 D '.,=
8'90,000
,. A!id.3est
2atio D
Cash &quivalents I 5ar*etale $e!urities I
#et 2e!eivales
Current 1iailities
D 8100,000 I 8;0,000 I 8',0,000 D
1.,1
8'90,000
-.19
/ '011 Cengage 1earning. All 2ights 2eserved. 3his edition is intended for use outside of the 4.$. only, with !ontent that may e different
from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
6. Cash 2atio D Cash &quivalents I 5ar*etale
$e!urities
Current 1iailities
D 8100,000 I 8;0,000 D 0.;'
8'90,000
-.'0
/ '011 Cengage 1earning. All 2ights 2eserved. 3his edition is intended for use outside of the 4.$. only, with !ontent that may e different
from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
.
3he &ffe!t On
A!id
(or*ing Current 3est Cash
3ransa!tion Capital 2atio 2atio 2atio
a. . . . .
. none none none none
!. none I I .
d. I I I I
e. I I I I
f. none none none none
g. . . . .
h. none I I .
i. I I I I
F. I I I none
*. none I I .
l. none none none none
m. . . . none
;. Bill)s Hrodu!e does -0 per!ent of its usiness during 7une, 7uly, and August.
Aor Jear &nded Aor Jear &nded
+e!emer ,1,
'010
7uly ,1, '010
#et $ales $700,000 $690,000
2e!eivales, less allowan!e for
doutful a!!ounts%
Beginning of period $ 45,000 $ 80,000
>allowan!e, 7anuary 1, 8',000K August
1, 8,,000?
&nd of period
>allowan!e, +e!emer ,1, $ 50,000 $ 85,000
8,,000K 7uly ,1,
8,,;00?
2equired%
a
.
Compute the days) sales in re!eivales for 7uly ,1, '010, and +e!emer ,1, '010, ased on
the data aove.

.
Compute the a!!ounts re!eivale turnover for the period ended 7uly ,1, '010, and
+e!emer ,1, '010.
!
.
Comment on the results from >a? and >?.
-.'1
/ '011 Cengage 1earning. All 2ights 2eserved. 3his edition is intended for use outside of the 4.$. only, with !ontent that may e different
from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
-.''
/ '011 Cengage 1earning. All 2ights 2eserved. 3his edition is intended for use outside of the 4.$. only, with !ontent that may e different
from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
A#$%
a
.
+ays) sales in re!eivales +e!emer ,1,
'010
7uly ,1,
'010
:ross 2e!eivales $ 53,000 $ 88,500
#et $alesB,-; $ 700,000 $ 690,000
365 365
= 27.6 = 46.8

.
A!!ounts 2e!eivale
3urnover D
#et $ales
Average :ross 2e!eivales
+e!emer ,1,
'010%
8=00,000 D
16.0
>86=,000 I 8;,,000? B
'
7uly ,1, '010% 8-90,000 D
<.0
>8<,,000 I 8<<,;00? B
'
!
.
Bill)s Hrodu!e is a seasonal usiness. 3herefore, the !omputation of days) sales in
re!eivales and a!!ounts re!eivale turnover are distorted. 3hese figures would e helpful
when !omparing with prior years on the same date.
-. 2equired%
a
.
$tar* Company has !omputed its a!!ounts re!eivale turnover in days to e ,-. Compute
the a!!ounts re!eivale turnover per year.

.
$tar* Company has !omputed its a!!ounts re!eivale turnover per year to e 10. Compute
the a!!ounts re!eivale turnover in days.
!
.
$tar* Company has gross re!eivales at the end of the year of 8,<0,000 and net sales for
the year of 81,<;0,000. Compute the days) sales in re!eivales at the end of the year.
d
.
$tar* Company has net sales of 8',;00,000 and average gross re!eivales of 8''6,000.
Compute the a!!ounts re!eivale turnover.
-.',
/ '011 Cengage 1earning. All 2ights 2eserved. 3his edition is intended for use outside of the 4.$. only, with !ontent that may e different
from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
A#$%
a
.
A!!ounts 2e!eivale 3urnover
D
,-; D ,-; D 10.1
2e!eivale 3urnover in +ays ,- 3imes

.
A!!ounts 2e!eivale
3urnover in +ays D
,-;
D ,-
;
D ,-.;
A!!ounts 2e!eivale 3urnover per Jear 10 days
! +ays) $ales in
2e!eivales D
:ross
2e!eivale
s
D 8,<0,000
#et $ales B
,-;
81,<;0,0
00 B ,-;
D =;.0
days
d
.
A!!ounts
2e!eivale
D
#et $ales D 8',;00
,000
Average :ross
2e!eivales
8''6,
000
D 11.' times
=. Alpha Company would li*e to estimate how long it will ta*e to realize !ash from its ending inventory.
Aor this purpose the following data are sumitted%
A!!ounts 2e!eivale, less allowan!e for doutful
a!!ounts of 860,000
$660,0
00
&nding Inventory
$750,0
00
#et $ales
$5,650
,000
Cost of :oods $old
$4,250
,000
+ays) $ales in Inventory D &nding Inventory
Cost of :oods $old B ,-;
+ays) $ales in 2e!eivales D :ross 2e!eivales
#et $ales B ,-;
2equired%
&stimate how long it will ta*e to realize !ash from the ending inventory.
-.'6
/ '011 Cengage 1earning. All 2ights 2eserved. 3his edition is intended for use outside of the 4.$. only, with !ontent that may e different
from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
A#$%
8=;0,000 D -6.6 8=00,000 D 6;.'
86,';0,000 B ,-; 8;,-;0,000 B ,-;
-6.6 I 6;.' D 109.- days
-.';
/ '011 Cengage 1earning. All 2ights 2eserved. 3his edition is intended for use outside of the 4.$. only, with !ontent that may e different
from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
<. Gind Company presents the following data for '010%
A!!ounts 2e!eivale, less allowan!e for doutful a!!ounts of 860,000 $780,000
&nding Inventory, lifo >estimated repla!ement !ost 8<00,000? $500,000
#et $ales $4,750,000
Cost of :oods $old >estimated repla!ement !ost, 86,1;0,000? $3,550,000
2equired%
a
.
Compute the days) sales in re!eivales.

.
Compute the days) sales in inventory, using the !ost figure.
!
.
Compute the days) sales in inventory, using the repla!ement !ost for the inventory and the
!ost of goods sold.
d
.
&xplain whi!h days) sales in inventory figure is proaly more realisti!, the one !omputed
in >? or >!?.
A#$%
a
.
+ays) $ales in 2e!eivales D :ross 2e!eivales
#et $ales B ,-;
D 8<'0,000 D -,.0
86,=;0,000 B ,-;

.
+ays) $ales in Inventory D &nding Inventory
Cost of :oods $old B ,-;
D 8;00,000 D ;1.6
8,,;;0,000 B ,-;
!
.
+ays) $ales in Inventory >using the repla!ement !ost? D &nding Inventory
&stimated :oods
soldB,-;
D 8<00,000 D =0.,-
86,1;0,000 B ,-;
d
.
3he days) sales in inventory figure !omputed in >!? is proaly more realisti! e!ause it
!ompares similar !osts for oth inventory and !ost of goods sold.
-.'-
/ '011 Cengage 1earning. All 2ights 2eserved. 3his edition is intended for use outside of the 4.$. only, with !ontent that may e different
from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
-.'=
/ '011 Cengage 1earning. All 2ights 2eserved. 3his edition is intended for use outside of the 4.$. only, with !ontent that may e different
from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
9. 2equired%
Comment on the usual influen!e from a swit!h to lifo from fifo on the following variales during an
inflationary period%
a
.
revenue

.
gross profit
!
.
!ost of goods sold
d
.
profit
e
.
in!ome taxes
f. !ash flow
A#$%
a
.
A swit!h to lifo will usually not influen!e revenue e!ause revenue is usually more
demandBsupply.related than !ost.related.

.
:ross profit will usually de!line e!ause of higher !ost of goods sold.
!
.
Cost of goods sold will in!rease e!ause of using the most re!ent !ost.
d
.
Hrofits will de!rease e!ause of the higher !ost of goods sold.
e
.
In!ome taxes will de!rease e!ause of the lower profit.
f. Cash flow will in!rease e!ause of the lower taxes.
10. Anne &lizaeth Company)s Balan!e $heet for +e!emer ,1, '010, and In!ome $tatement Aor the Jear
&nded +e!emer ,1, '010, are given elow.
Balan!e $heet
Anne &lizaeth Company
+e!emer ,1, '010
'010 '009
Assets%
Current Assets%
Cash $ 50,450 $ 28,538
5ar*etale $e!urities 25,000 20,500
A!!ounts 2e!eivale, less allowan!e of 810,000 60,000 50,000
Inventory, 1ifo 90,000 70,000
Hrepaid 8,000 7,000
3otal Current Assets $233,450 $176,038
Hroperty, Hlant, and &quipment%
1and 9,000 8,000
-.'<
/ '011 Cengage 1earning. All 2ights 2eserved. 3his edition is intended for use outside of the 4.$. only, with !ontent that may e different
from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
Buildings and &quipment 220,000 210,000
$229,000 $218,000
1ess A!!umulated +epre!iation (68,000) (60,000)
3otal Assets $394,450 $334,038
-.'9
/ '011 Cengage 1earning. All 2ights 2eserved. 3his edition is intended for use outside of the 4.$. only, with !ontent that may e different
from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
1iailities and
$hareholders) &quity%
Current 1iailities%
A!!ounts Hayale $ 35,000 $ 30,000
A!!rued Compensation 8,000 7,000
In!ome 3axes 7,000 6,000
3otal Current 1iailities $ 50,000 $ 43,000
1ong.3erm +et 40,000 11,038
$hareholders) &quity%
Common $hares 60,000 60,000
2etained &arnings 244,450 220,000
$304,450 $280,000
3otal 1iailities and $hareholders) &quity $394,450 $334,038
In!ome $tatement
Anne &lizaeth Company
Aor the Jear &nded +e!emer ,1, '010
'010 '009 '00<
#et sales $718,500 $650,500 $640,000
Cost of goods sold 580,000 520,000 515,000
:ross profit $138,500 $130,500 $125,000
Operating expenses%
$elling, general, and administrative $ 71,000 $ 67,000 $ 65,000
Interest 4,000 3,000 2,500
$ 75,000 $ 70,000 $ 67,500
&arnings efore in!ome taxes $ 63,500 $ 60,500 $ 57,500
In!ome taxes 30,000 29,000 28,000
#et earnings $ 33,500 $ 31,500 $ 29,500
2equired%
a
.
Compute the following ratios for '010%
1
.
A!!ounts re!eivale turnover
'
.
5er!handise inventory turnover
,
.
(or*ing !apital
6
.
Current ratio
;
.
A!id.test ratio >!onservative?
-
.
$ales to wor*ing !apital
-.,0
/ '011 Cengage 1earning. All 2ights 2eserved. 3his edition is intended for use outside of the 4.$. only, with !ontent that may e different
from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
A#$%
1
.
A!!ounts re!eivale turnover D #et $ales
Average :ross 2e!eivales
8=1<,;00 D 8=1<,;00 D 11.0;
L>8-0,000 I 810,000? I >8;0,000 I 810,000?M B ' 8-;,000
'
.
5er!handise Inventory 3urnover D Cost of :oods
$old
D
Average
Inventory
8;<0,000 D 8;<0,000 D =.';
>890,000 I 8=0,000? B ' 8<0,000
,
.
(or*ing !apital D Current Assets .
Current 1iailities
8',,,6;0 . 8;0,000 D 81<,,6;0
6 Current ratio D
Current
assetsBCurrent
liailities
8',,,6;0 D 6.-=
8;0,000
;
.
A!id.3est
2atio
D Cash equivalents I 5ar*etale $e!urities I
#et 2e!eivales
Current 1iailities
8;0,6;0 I 8';,000 I 8-0,000 D 81,;,6;0 D '.=1
8;0,000 8;0,000
-
.
$ales to (or*ing Capital D $ales
Average (or*ing Capital
8=1<,;00 8=1<,;00
L>8',,,6;0 . 8;0,000? I >81=-,0,< . 86,,000M B ' D 81;<,'66 D 6.;6
-.,1
/ '011 Cengage 1earning. All 2ights 2eserved. 3his edition is intended for use outside of the 4.$. only, with !ontent that may e different
from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
-.,'
/ '011 Cengage 1earning. All 2ights 2eserved. 3his edition is intended for use outside of the 4.$. only, with !ontent that may e different
from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
11. 1isted elow are several ratios%
a
.
days) sales in re!eivales

.
a!!ounts re!eivale turnover
!
.
a!!ounts re!eivale turnover in days
d
.
days) sales in inventory
e
.
inventory turnover
f. inventory turnover in days
g
.
operating !y!le
h
.
wor*ing !apital
i. !urrent ratio
F. a!id.test ratio
*
.
!ash ratio
l. sales to wor*ing !apital
2equired%
5at!h the letter that goes with ea!h formula.
NNNNN 1. $ales
Average (or*ing Capital
NNNNN '. #et $ales
Average :ross 2e!eivales
NNNNN
,.
Current Assets . Current
1iailities
NNN
NN
6.
Cash &quivalents I 5ar*etale
$e!urities I #et 2e!eivales
Current 1iailities
NNNNN ;. :ross 2e!eivales
#et $alesB,-;
NNNNN -. Average :ross 2e!eivales
#et $alesB,-;
NNNNN =. Average Inventory
Cost of :oods $oldB,-;
NNNN
N <.
Cash &quivalents I 5ar*etale
$e!urities
Current 1iailities
-.,,
/ '011 Cengage 1earning. All 2ights 2eserved. 3his edition is intended for use outside of the 4.$. only, with !ontent that may e different
from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
NNNNN 9. Current Assets
Current 1iailities
NNNN
N 10.
A!!ounts
2e!eivale
I Inventory
3urnover
3urnover in
+ays
in +ays
NNNNN
11.
Cost of :oods $old
Average Inventory
NNNNN
1'.
&nding Inventory
Cost of :oods $oldB,-;
A#$%
1. l
'.
,. h
6. F
;. a
-. !
=. f
<. *
9. i
10
.
g
11
.
e
1'
.
d
1'. 3he following are the inventory re!ords of the :arret Company%
4nits Cost 3otal
7anuary 1 60 81' 86<0
Hur!hases%
Aeruary 10 '0 1, '-0
7uly 1; 60 16 ;-0
#ovemer 1 ;0 1; =;0
+e!emer 10
,0
1- 6
<0
Availale 1<0 8',;,0
&nding inventory !onsists of ,0 units from the 7uly pur!hase.
-.,6
/ '011 Cengage 1earning. All 2ights 2eserved. 3his edition is intended for use outside of the 4.$. only, with !ontent that may e different
from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.
#ote% 3he !ompany uses a periodi! inventory system.
2equired%
Cal!ulate ending inventory and !ost of sales, using% >a? AIAO, >? 1IAO, >!? average, and >d? spe!ifi!
identifi!ation.
A#$%
a
.
AIAO
&nding Inventory Cost of $ales
,0 81- D 86<0 8',;,0 . 86<0 D 8',0;0

.
1IAO
&nding Inventory Cost of $ales
,0 81' D 8,-0 8',;,0 . 8,-0 D 8',1=0
!
.
Average
&nding Inventory Cost of $ales
1<0 O 8',;,0 D 816.0-
,0 816.0- D 86'1.<0 8',;,0 . 86'1.<0 D 8',10<.'0
d
.
$pe!ifi! identifi!ation
&nding Inventory Cost of $ales
,0 816 D 86'0 8',;,0 . 86'0 D 8',110
-.,;
/ '011 Cengage 1earning. All 2ights 2eserved. 3his edition is intended for use outside of the 4.$. only, with !ontent that may e different
from the 4.$. &dition. 5ay not e s!anned, !opied, dupli!ated, or posted to a puli!ly a!!essile wesite, in whole or in part.