Question

Armada Company has these comparative balance sheet data:

ARMADA COMPANY
Balance Sheets
December 31,
2017 2016
Cash $ 40,000 $ 30,000
Accounts receivable (net) 65,000 60,000
Inventory 60,000 50,000
Plant assets (net) 185,000 180,000
$350,000 $320,000
Accounts payable $ 50,000 $ 60,000
Mortgage payable (15%, due in 15 years) 100,000 100,000
Common stock, $10 par 140,000 120,000
Retained earnings 60,000 40,000
$350,000 $320,000
Additional information for 2017:
1. Net income was $25,000.
2. Sales on account were $450,000. Sales returns and allowances amounted to $25,000.
3. Cost of goods sold was $275,000.
4. Net cash provided by operating activities was $49,000.
5. Capital expenditures were $23,000, and cash dividends were $18,000.
Instructions
Compute the following ratios at December 31, 2017.
(a) Current. (e) Days in inventory
(b) Accounts receivable turnover. (f) Free cash flow.
(c) Average collection period.
(d) Inventory turnover.

Answer 1

a. Current ratio = Current assets/Current liabilities

Current ratio = [40,000+65,000+60,000] / 50,000

Current ratio = 3.3

b. Accounts receivable turnover = Sales / Average account receivable

Accounts receivable turnover = [450,000 - 25,000] / [(65,000+60,000)/2]

Accounts receivable turnover = 425,000 / 62,500

Accounts receivable turnover = 6.80

c. Average collection period = 365 / Accounts receivable turnover

Average collection period = 365 / 6.80

Average collection period = 53.67 days

d. Inventory turnover = Cost of goods sold / Average Inventory

Inventory turnover = 275,000 / [(60,000+50,000)/2]

Inventory turnover = 275,000 / 55,000

Inventory turnover = 5

e. Days in inventory = 365 / Inventory turnover

Days in inventory = 365 / 5

Days in inventory = 73 days

f. Free cash flow = Net cash flow from operating activities - Capital expenditure - Cash dividend

Free cash flow = $49,000 - $23,000 - $18,000

Free cash flow = $8,000