Question

Booker Corporation had the following comparative current assets and current liabilities: Dec. 31, 2019 Dec. 31, 2018 Current assets Cash $60,000 $30,000 Short-term investments 40,000 10,000 Accounts receivable 55,000 95,000 Inventory 110,000 90,000 Prepaid expenses 35,000 20,000 Total current assets $300,000 $245,000 Current liabilities Accounts payable $140,000 $110,000 Salaries payable 40,000 30,000 Income tax payable 20,000 15,000 Total current liabilities $200,000 $155,000 During 2019, credit sales and cost of goods sold were $750,000 and $400,000, respectively.
Compute the following liquidity measures for 2019.
1. Current ratio
2. Working capital
3. Acid-test ratio
4. Accounts receivable turnover times
5. Inventory turnover times

Answer 1

Answer:

1. $1.5

2. $95,000

3. 5.28

4. $75,000

5. $100,000

Explanation:

The computation of liquidity measures for 2019 is shown below:-

Computation of the different Liquidity Measures    

1.  Current Ratio  = Current assets ÷ Current liabilities

= $300,000 ÷ $200,000    

= $1.5

2. Working Capital for 2019 = Current assets ÷ Current liabilities  

= $300,000 - $200,000    

= $100,000

Working Capital for 2018 = $245,000 - $155,000

= $90,000

Average Working Capital = (Opening Working capital + Closing Working capital) ÷ 2

= ($90,000 + $100,000) ÷ 2

= $95,000

3. Acid Test Ratio = Cash and cash equivalents + Short Term Investment + Current Receivables ÷ Current liabilities

= ($60,000 + $40,000 + $55,000) ÷ $200,000    

= 5.28

4. Accounts receivable turnover times

Accounts Receivable Turnover Times = Net Credit Sales ÷ Average Accounts Receivable

= $750,000 ÷ $75,000

= 10

Average Accounts Receivable = ($55,000 + $95,000) ÷ 2

= $75,000

5. Inventory Turnover Times = Cost of Goods Sold ÷ Average Inventory  

= $400,000 ÷ $100,000

= 4

Average Inventory = ($110,000 + $90,000) ÷ 2

= $100,000

therefore we have applied the above formula.