Profitability Ratios Bryce Company manufactures pet supplies

Question:

Profitability Ratios Bryce Company manufactures pet supplies. However, Bryce’s electronic accounting system recently crashed and, unfortunately, only a partial recovery of the company’s year-end accounting records (which included several profitability ratios) was possible. As a result, Bryce’s controller, a bright young CMA named Jeanette, must compute various lost financial account balances using the recovered information listed below. Long-term liabilities $1,400,000 Ending inventory is the same as beginning inventory. Gross margin $2,700,000 Net sales $7,400,000 Accounts receivable turnover 40 Ending accounts receivable is the same as beginning accounts receivable. Total liabilities $1,800,000 Current ratio 4 Cash $540,000 Quick ratio 3.5 Inventory turnover in days 3.65 Required: Assume 365 days per year.

  1. Calculate current liabilities. $
  2. Calculate current assets. $
  3. Calculate average accounts receivable. Round your answer to the nearest whole dollar, if required. $
  4. Calculate marketable securities. Round your answer to the nearest whole dollar, if required. $
  5. Calculate average inventory. $

Answer:

As given in Question:
Long term Liabilities = $1,400,000
Total Liabilities = $1,800,000
Net Sales = $7,400,000
Gross Margin = $2,700,000
Cash Balance = $5,40,000
Account Receivable Turnover = 40
Current Ratio = 4
Quick Ratio = 3.5
Inventory Turnover In Days = 3.65
Ending Inventory = Beginning Inventory
Ending Accounts Receivable = Beginning Accounts Receivable

  1. Calculation of Current Liabilities
    Current Liability = Total Liabilities – Long Term Liabilities
    = $1,800,000 – $1,400,000
    = $400,000
  2. Calculation of Current Assets
    Current Ratio = Current Assets / Current Liabilities
    Therefore, Current Assets = Current Ratio * Current Liabilities
    = 4 * $400,000
    = $1,600,000
  3. Calculation of Average Accounts Receivables
    Accounts Receivable Turnover Ratio = Net Sales / Average Account Receivable
    Therefore, Average Accounts Receivable = Net Sales / Accounts Receivable Turnover Ratio
    = $7,400,000 / 40
    = $185,000
  4. Calculation of Marketable Securities
    Quick Ratio = Quick Assets / Current Liabilities

Where,
Quick Assets = Cash + Accounts Receivable + marketable Securities
= $540,000 + $185,000 + Marketable Securities
= $725,000 + Marketable Securities
Now putting figures into formula,
3.5 = ($725,000 + Marketable Securities) / $400,000
$1,400,000 = $725,000 + Marketable Securities

Hence,

Marketable Securities = $1,400,000 – $725,000
= $675,000

  1. Calculate Average Inventory
    -As we Know,
    Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Where,

Cost of Goods sold = Net Sales – Gross Margin
= $7,400,000 – $2,700,000
= $4,700,000
Inventory turnover Ratio = 365 Days / Inventory Turnover in Days
= 365 / 3.65
= 100

Now subsituting figures in the formula,
100 = $4,700,000 / Average Inventory
Average Inventory = $4,700,000 / 100
= $47,000

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