Wegener Corporation's most recent balance sheet and income statement appear below:Balance SheetDecember 31, Year 2 and Year 1(in thousands of dollars)AssetsYear 2Year 1Current assets: Cash$90 $110 Accounts receivable, net 220 270 Inventory 130 150 Prepaid expenses 70 80 Total current assets 510 610 Plant and equipment, net 1,000 920 Total assets$1,510 $1,530 Liabilities and Stockholders' Equity Current liabilities: Accounts payable$90 $110 Accrued liabilities 60 60 Notes payable, short term 50 60 Total current liabilities 200 230 Bonds payable 130 140 Total liabilities 330 370 Stockholders' equity: Common stock, $1 par value 400 400 Additional paid-in

Question

capital 240  240 Retained earnings 540  520 Total stockholders' equity 1,180  1,160 Total liabilities & stockholders' equity$1,510 $1,530?Income StatementFor the Year Ended December 31, Year 2(in thousands of dollars)Sales (all on account)$1,400 Cost of goods sold 860 Gross margin 540 Selling and administrative expense 450 Net operating income 90 Interest expense 19 Net income before taxes 71 Income taxes (30%) 21 Net income$50 Required:Compute the following for Year 2:a. Working capital.b. Current ratio.c. Acid-test (quick) ratio.d. Accounts receivable turnover.e. Average collection period.f. Inventory turnover.g. Average sale period.

What will be an ideal response?

Answer 1

a.

Working capital = Current assets - Current liabilities

= $510 - $200 = $310

 
b.

Current ratio = Current assets ÷ Current liabilities

= $510 ÷ $200 = 2.55

 
c.

Acid-test (quick) ratio = Quick assets* ÷ Current liabilities

= $310 ÷ $200 = 1.55

*Quick assets

= Cash + Marketable securities + Accounts receivable + Short-term notes receivable

= $90 + $0 + $220 = $310

 
d.

Accounts receivable turnover = Sales on account ÷ Average accounts receivable*

= $1,400 ÷ $245 = 5.71

*Average accounts receivable = ($220 + $270) ÷ 2 = $245

 
e.

Average collection period = 365 days ÷ Accounts receivable turnover (see above)

= 365 days ÷ 5.71 = 63.9 days

 
f.

Inventory turnover = Cost of goods sold ÷ Average inventory balance*

= $860 ÷ $140 = 6.14

*Average inventory balance = ($130 + $150) ÷ 2 = $140

 
g.

Average sale period = 365 days ÷ Inventory turnover (see above)

= 365 days ÷ 6.14 = 59.4 days