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# Balance sheet data, quick ratio and working capital

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Question 10/11:

Based on the following data, what is the quick ratio, rounded to one decimal point?

Accounts payable \$ 30,000
Accounts receivable 65,000
Accrued liabilities 7,000
Cash 20,000
Intangible assets 40,000
Inventory 72,000
Long-term investments 100,000
Long-term liabilities 75,000
Marketable securities 36,000
Notes payable (short-term) 20,000
Property, plant, and equipment 625,000
Prepaid expenses 2,000

#### Solution Preview

QUICK RATIO

(Current Assets - Inventory)/(Current Liabilities)

Let's make a list of the current assets and liabilities.

Current Assets
Accounts receivable 65,000
Cash 20,000
Inventory 72,000
Marketable securities 36,000
Prepaid expenses 2,000
TOTAL \$195,000
[There are other assets, such as "Intangible Assets", ...

#### Solution Summary

The solution explains the quick ratio, excludes accounts not used, and then makes the calculation for the correct answer. It then examines what is included in the working capital and provides the calculations for the correct answer.

\$2.19

## Expanded Analysis - ABC Corporation has in recent years maintained the following relationships among the data on its financial statements

ABC Corporation has in recent years maintained the following relationships among the data on its financial statements:

Gross profit rate on net sales 40%
Net profit rate on net sales 10%
Rate of selling expenses to net sales 20%
Accounts Receivable turnover 8 per year
Inventory turnover 6 per year
Acid test ratio 2 to 1
Current ratio 3 to 1
Quick asset composition: 8% cash,
32% marketable securites, 60% accounts
receivable
Asset turnover 2 per year
Ratio of total assets to intangible assets 20 to 1
Ratio of accumulated depreciation to cost of
fixed assets 1 to 3
Ratio of account receivable to accounts payable 1.5 to 1
Ratio of working capital to stockholders' equity 1 to 1.6
Ratio of total deby to stockholder's equity 1 to 2

The corporation had a net income of \$120,000 for 2004, which resulted in earnings of \$5.20 per share of common stock. Addition information includes the following:
Capital stock authorized, issues all in 1970, and outstanding:
Common, \$10 per share pare value, issued at 10% premium
Preferred, 6% nonparticipating, \$100 per share par value, issued at a 10% premium
Market value per share of common at December 31, 2004: \$78
Preferred dividends paid in 2004: \$3,000
Times Interest Earned in 2004: 33
The amounts of the following were the same at December 31, 2004, as at
January 1, 2004: inventory, accounts receivalbe, 5% bonds payable - due
2013, and total stockholders' equity.
All purchases and sales were on account.

a. Prepare in good form the condensed balance sheet and income statment for the year ending December 31, 2004, presenting the amounts you would expect to appear on ARgo's financial statments (ignoring income taxes). Major captions appearing Argo's balance sheet are current assets, fixed assets, intangible assets, current liabilities, long term liabilities, and stockholders' equity. In addition to the accounts divulged in the problem, you should include accounts for prepaid expenses, accrued expenses, and administrative expenses. Supporting computations should be in good form.
b. Compute the following for 2004. (Show your computations):
1. Rate of return on stockholders' equity
2. Price/earnings ration for common stock
3. Dividends paid per share of common stock
4. Dividends paid per share of preferred stock
5. Yield on common stock

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