Question

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

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

$\begin{array}{c}\mathbf{Acid}\mathbf{-}\mathbf{test}\mathbf{ratio}=\frac{\mathbf{(}\mathbf{Cash}+\mathbf{Short}\mathbf{-}\mathbf{terminvestments}+\mathbf{Netcurrentreceivables}\mathbf{)}}{\mathbf{Current}\mathbf{Liabilities}}\\ =\frac{\mathbf{\$}\mathbf{104}\mathbf{,}\mathbf{000}+\$56,000+\mathbf{\$}\mathbf{108}\mathbf{,}\mathbf{000}}{\mathbf{\$}\mathbf{72}\mathbf{,}\mathbf{000}+\mathbf{\$}\mathbf{128}\mathbf{,}\mathbf{000}}\\ =\frac{\$268,000}{\$200,000}\\ =\mathbf{1}\mathbf{.}\mathbf{34}\end{array}$

Step 3:Calculation of account receivable turnover ratio

$\begin{array}{c}\mathbf{\text{Accounts\hspace{0.17em}receivable\hspace{0.17em}turnover\hspace{0.17em}ratio}}\mathbf{=}\frac{\mathbf{\text{Net\hspace{0.17em}credit\hspace{0.17em}sales}}}{\mathbf{\text{Average\hspace{0.17em}accounts\hspace{0.17em}receivable}}}\\ \mathbf{=}\frac{\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{168}\mathbf{,}\mathbf{000}}{\mathbf{\$}\mathbf{88}\mathbf{,}\mathbf{000}}\\ \mathbf{=}\mathbf{13}\mathbf{.3}\end{array}$

Working note:

Calculation of average accounts receivable

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

Step 4:Calculation of day sales receivables

$\begin{array}{c}\mathbf{\text{Day\hspace{0.17em}sales\hspace{0.17em}receivable}}\mathbf{=}\frac{\mathbf{365}}{\mathbf{\text{Accounts\hspace{0.17em}receivable\hspace{0.17em}turnover\hspace{0.17em}ratio}}}\\ \mathbf{=}\frac{\mathbf{365}}{\mathbf{13}\mathbf{.3}}\\ \mathbf{=}\mathbf{27}\mathbf{.44}\mathbf{\text{\hspace{0.17em}days}}\end{array}$