Accounting case Essay

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Part B

Calculate theliquidity ratios for 2009

1. Current Ratio

Formula

Current Ratio = Current assets / Current liabilities

Current assets = 292,000

Current liabilities = 80,000

Current Ratio = 3.65

Compare the company's results to the industry average

Company

Industry Average
3.65:1

3:01

The industry average's current ratio is 3:1. The company's current ratio is 3.65.

The company has higher current ratio than industry average.

Thus, the company has strong short-term dabt-paying ability.

Manu

2. Average collection period

Formula

Average collection period = 365 days/ Receivable turnovers

Receivables turnover = Net credit sales / Average gross accounts receivable

Net credit sales = 1,470,000 (given as sales)

Average gross accounts receivable = (95,000 + 105,000) / 2 = 100,000

(note: 95,000 is 2009 A/R, 105,000 is 2008 A/R)

Receivables turnover = 1,470,000 / 100,000 = 14.7

Days: 365 days

Receivable turnovers = 14.7

Average collection period = 24.83 days

Compare the company's results to the industry average

Company

Industry Average
24.83 days

28 days

The company has lower average collection period than

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