Ratios Task

Using the information below, compute the following amounts and ratios for the Quant Corporation for
the current year. Assume that (1) the only effects on retained earnings are net income and cash
dividends for the year, and (2) only common stock dividends were declared (none for preferred stock).
Enter your amounts in the second column rounded to the nearest percent or nearest dollar, as
appropriate. For example, if your computation of a ratio is 249.38%, enter 2.49. Use the calculator
function available to you.
Current year financial statement information for the Quant Corporation:
Balance Sheet Jan. 1 Dec. 31

Cash $ 100 $ 150
Receivables, net 300 320
Inventories 600 660
Prepaids 200 270
Plants assets 2,000 2,400
Accumulated depreciation (800) (1,000)
Total assets $2,400 $2,800
Accounts payable $ 120 $ 160
Income tax payable 80 70
Accrued payables 90 210
Current maturity of long-term debt 300 300
Bonds payable 500 400
Preferred stock, $100 par 100 100
Common stock, $1 par 200 250
PIC-common 300 350
Retained earnings 810 1,080
Treasury stock (100) (120)
Total liabilites and OE $2,400 42,800
Income Statement
Sales $3,800
Cost of goods sold (1,700)
Gross margin 2,100
Operating expenses (1,400)
Interest expense (100)
Income before tax 600
Income tax expense (180)
Net income $ 420
Ratio or amount Computation
Working capital
Current ratio
Acidtest (quick) ratio
Accounts receivable turnover
Inventory turnover
Operating cycle in days 165
Rationale:
Working capital = current assets - current liabilities = (150 + 320 + 660 + 270) - (160 + 70
+ 210 + 300) = 1,400 - 740 = 660
Current ratio = current assets/current liabilities = (150 + 320 + 660 + 270)/(160 + 70 +

210 + 300) = 1,400/740 = 1.89
Acidtest (quick) ratio = (cash + net receivables)/current liabilities = (150 + 320)/(160 +

70 + 210 + 300) = 470/740 = .64
Accounts receivable turnover = Sales/average net receivables = 3,800/.5(300 + 320) =

12.26
Inventory turnover = Cost of goods sold/average inventory = 1,700/.5(600 + 660) = 2.70
Transactions may increase or decrease a particular ratio, or have no effect. The first column below
lists a transaction. The second column lists a ratio along with its value just before the indicated
transaction. In the third column, indicate the immediate effect of the transaction on the ratio by
double-clicking on the related cell and select increase, decrease, or no effect from the popup list
provided. For each transaction, assume that the dollar amount of the transaction is not significant in
relation to the absolute amounts in the numerator and denominator of the relevant ratio before the
transaction.
Ratio and Value Before

Transaction Effect
Transaction
Purchase inventory on account Current ratio, 1.70 (170%) Decrease
Pay accounts payable Current ratio, .90 (90%) Decrease
Purchase inventory at year end (not
Inventory turnover, 11.4 Decrease
sold)
Purchase marketable securities to be
Current ratio, 1.50 (150%) No effect
held as trading securities
Record rent expense by reducing
Quick ratio, .76 (76%) No effect
prepaid rent
Rationale:
Purchase inventory on account: inventory (current asset) and accounts payable (current
liability) increase by the same amount. Current assets increase by a smaller percentage
because the numerator of the ratio before the transaction is larger than the denominator.
Therefore, the ratio decreases.
Pay accounts payable: cash (current assets) and accounts payable (current liabilities)
decrease by the same amount. Current assets decrease by a larger percentage because the
numerator before the transaction is smaller than the denominator. Therefore, the ratio
decreases.
Purchase inventory at year end (not sold): there is no effect on the numerator because cost
of goods sold is unaffected. However, the denominator, average inventory, is increased.
Therefore, the ratio is reduced.
Purchase marketable securities to be held as trading securities: current assets both
increase and decrease by the same amount. There is no effect on either the numerator or
denominator.
Record rent expense by reducing prepaid rent: prepaids are not included in quick assets.
There is no effect on either the numerator or denominator.

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Using the information below, compute the following amounts and ratios for the Quant Corporation for

Current year financial statement information for the Quant Corporation:

Balance Sheet Jan. 1 Dec. 31

Current ratio = current assets/current liabilities = (150 + 320 + 660 + 270)/(160 + 70 +

Acidtest (quick) ratio = (cash + net receivables)/current liabilities = (150 + 320)/(160 +

Accounts receivable turnover = Sales/average net receivables = 3,800/.5(300 + 320) =

Inventory turnover = Cost of goods sold/average inventory = 1,700/.5(600 + 660) = 2.70

Ratio and Value Before

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