The president of Starz Enterprises asks if you could indicate the impact certain transactions have on the following ratios:
Transactions Current Ratio Recievables Turnover Collection
(2:1) (10X) Period
1) Reorded $2500 sales on
account. The cost of goods
sold was 1,500.
2) Recorded bad debts expense
of $500 using allowance method.
3) Wrote off a $100 account
receivable as uncollectable.
4) Received $3,000 on cash
sale. The cost of the goods
sold was $1,800.
Complete the table indicating whether each transaction will increase (I), decrease (D) or have no effect (NE) on the specific ratios provided for Starz Enterprises.
Current ratio= Current Assets/Current Liabilities
Receivable turnover ratio= Net Credits Sales/ Average receivables
Average Collection period= 365/Receivable turnover ratio
1) Recorded $2500 sales on account. The cost of goods sold was 1,500.
This will increase the current ratio as there is a net increase in Current assets. As there will be increase in Debtors by 2500 and reduction in inventory by $1500.
The receivable turnover will reduce and average collection period will increase.
Current ratio- I
Receivable turnover ratio- D
The solution uses 324 words to look into which transactions will increase/decrease/have no effect on which ratios.