Requirement – 1
To calculate: The
Requirement – 1
Explanation of Solution
Current ratio:
Current ratio is used to determine the relationship between current assets and current liabilities. Current ratio is determined by dividing current assets and current liabilities.
Formula:
The current ratio of Company A for the past two year is as follows:
In 2015:
Here,
Current assets = $890,513 thousand
Current liabilities = $459,093 thousand
In 2014:
Current assets = $927,991 thousand
Current liabilities = $415,478 thousand
Therefore, the current ratio in the most recent year (2015) is weakened.
Requirement – 2
To calculate: The acid test ratio for the past two year, and discuss whether the acid test ratio improve or weaken in the most recent year.
Requirement – 2
Explanation of Solution
Acid-test Ratio:
It is a ratio used to determine a company’s ability to pay back its current liabilities by liquid assets that are current assets except inventory and prepaid expenses.
Formula:
The acid test ratio of Company A for the past two year is as follows:
In 2015:
Here,
Cash= $410,697 thousand
Accounts receivable = $67,894 thousand
Short-term investment= $0 thousand
Current liabilities = $459,093 thousand
In 2014:
Here,
Cash= $418,933 thousand
Accounts receivable = $73,882 thousand
Short-term investment= $10,002 thousand
Current liabilities = $415,478 thousand
Therefore, the acid test ratio in the most recent year (2015) is weakened.
Requirement – 3
The manner in which the current ratio and acid test ratio will change, if Company A used $100 million in cash to pay $100 million in accounts payable.
Requirement – 3
Explanation of Solution
Calculate current ratio if company used $100 million in current investments to pay $100 million in current accounts payable.
If the company used $100 million in current investments to pay $100 million in current accounts payable, the current assets and the current liabilities both decreases by $100 million. Thus, this transaction increases the current ratio. The calculation is as given below:
Calculate acid-test ratio if company used $100 million in current investments to pay $100 million in current accounts payable.
If the company used $100 million in current investments to pay $100 million in current accounts payable, the quick assets and the current liabilities both decreases by $100 million. Thus, this transaction increases the acid-test ratio. The calculation is as given below:
Therefore, both current and acid test ratio is increased.
Want to see more full solutions like this?
Chapter 8 Solutions
FINANCIAL ACCOUNTINGLL W/CONNECT >IC<
- Consolidated Aluminum is considering the purchase of a new machine that will cost $308,000 and provide the following cash flows over the next five years: $88,000, 92,000, $91,000, $72,000, and $71,000. What is the internal rate of return (IRR) for this piece of equipment? Use the Present Value tables in Time Value of Money Appendix e of the book or use Excel to calculate the answer. Round to 2 decimal places. O Cannot be determined from the information provided. O 11.30% O 11.28% O 11.00%arrow_forwardA contractor wanted to buy equipment ; current price of it is ( $ 50,000 ) . So , he requested the help of a bank , the bank agreed to help the contractor . The bank bought him the equipment he need , and sold it to him at a price of ( $ 66,000 ) , to be paid after five years from now . What interest rate the bank isarrow_forwardBank Al Ain Islami provides a financing facility based on the Murabaha principle to Seif Construction to purchase specialized Equipment to be used for their construction project. The amount of financing is $15,000,000 at a constant rate of return of 10% for a period of 5 years. Due to some cash flow problems, Seif Construction paid the final installment in Year 6. Required: i. ii. Present a statement showing the amount of Net Receivable, Unearned Murabaha Income, and Murabaha Income for the whole duration of the contract.Prepare journal entries for Bank Al Ain Islami for the above transactions (YO-Y6).arrow_forward
- 4-59. A transport company sets aside funds to maintain its trucks. It anticipates spending $3,000 on repairs in EOY 1, $2,000 in EOY 2, and $1,000 for the next 3 years. The interest rate is 10% per year. (4.10) a. What is the value of expenses if the interest rate is 0%? b. What is the present equivalent of the repair expenses at time 0? blir c. What is the annual equivalent expense during years ban.gouella 1-5?arrow_forwardYou have entered into an agreement for the purchase of land. The agreement specifies that you will take ownership of the land immediately. You have agreed to pay $55,000 today and another $55,000 in three years. Calculate the total cost of the land today, assuming a discount rate of (a) 3 %, (b) 5%, or (c) 7%. Note: Use tables, Excel, or a financial calculator. Do not round your intermediate values. Round your answers to 2 decimal places. (FV of $1. PV of $1. FVA of $1, and PVA of $1) Answer is complete but not entirely correct. Compounding Period Due Payment Interest Amount Total Cost of Rate Land Today a. $ 55,000 3% Annually 3 years S 155,573.62 b. 55,000 5% Annually 3 years 238,121.22 C. 55,000 7% Annually 3 3y years 296.410.920arrow_forwardOne year ago, JK Mfg. deposited $20,500 in an investment account for the purpose of buying new equipment four years from today. Today, it is adding another $15,000 to this account. The company plans on making a final deposit of $10,000 to the account one year from today. How much will be available when it is ready to buy the equipment, assuming the account pays 3.5 interest?arrow_forward
- Goliath Banking Corporation (GBC) offers an "Income Investment Product" (IIP) for customers. The details for this product is as follows: Customers pay $941.29024136888 to buy an IIP. The IIP will pay out $49 at the end of each year for 13 years The IIP will pay out a further single payment of $1,000 after 13 years There are no further payments after this single payment at time 13. (a) Calculate the return GBC promised to investors that buy this product, expressed an effective annual rate. Give your answer as a percentage to 4 decimal places. (b) If instead GBC were to offer investors an effective annual return of 3.4571%, what price should they charge for this product? Give your answer in dollars, to the nearest cent. (c) Suppose that GBC decides to delay the final single payment of $1,000 by one year (assume this is permitted in the fine print of the IIP). Assuming no other changes are made, which ONE of the following statements is true for investors that have already purchased…arrow_forwardYou have been assigned to check the valuation of InfoSystems, a software firm, done by a colleague of you. Infosystems has an expected life 5 years, constant cash flows over this period, and zero salvage value. The income statement of the Infosystems is given as follows: Revenues - Operating Expenses EBIT - Interest expenses Taxable Income - Taxes Net Income Years 1-5 €1,000 €550 €450 €85 €365 €146 €219 Infosystems has no capital expenditures, depreciation or working capital needs, i.e. the earnings are the cash flows to the firm. The cost of capital is 10% i. Estimate the value of Infosystems. ii. Assume that the value derived in (i) is the one also estimated by your colleague. How would you change your calculations if you are given that the cash flows are real cash flows and the cost of capital is the nominal cost of capital. The expected inflation rate is 2% annually. Comment on your answer.arrow_forward2. The company is setting aside funds to acquire a property for its new warehouse. The company needs P74,735 to make the down payment. The company deposits P5,000/month in the fund account which pays 1% per month. As the financial manager you have been tasked to determine how long it will take to accumulate enough funds to acquire the property? arrow_forward
- LEW Company purchased a machine at a price of $100,000 by signing a note payable, which requires a single payment of $123,210 in two years. a. Assuming annual compounding of interest, what rate of interest is being paid on the loan? Use Excel function Rate to calculate the rate. b. What would be the purchase price of the machine had LEW negotiated a single payment of $120,000 in two years, using the same effective rate? Use excel only..arrow_forwardPace Electronics sells a diagnostic machine to a hospital with a four-year payment plan. The company would like to estimate the bad debt allowance needed to cover the notes outstanding over the next four years. Estimated lost cash flows and the probability of occurrence for each of the next four years are summarized in the following schedule. The risk-free rate is 3% . Begin by computing the estimated cash flow loss each year. (Enter all amounts as positive amounts.) Projected Cash Flow Expected Loss from Uncollected Probability of Cash Flow Year Notes Loss Occurring Loss 2023 $9,000 65 % 20,000 35 % Total expected cash flow loss in 2023 2024 $15,000 20 % 26,000 45 % 65,000 35 % Total expected cash flow loss in 2024 2025 $5,000 85 % 19,000 15 % Total expected cash flow loss in 2025…arrow_forward4-59. A transport company sets aside funds to maintain its trucks. It anticipates spending $3,000 on repairs in EOY 1, $2,000 in EOY 2, and $1,000 for the next 3 years. The interest rate is 10% per year. (4.10) a. What is the value of expenses if the interest rate is 0%2 b. What is the present equivalent of the repair expenses at time 0? c. What is the annual equivalent expense during years 1-5?arrow_forward
- Cornerstones of Cost Management (Cornerstones Ser...AccountingISBN:9781305970663Author:Don R. Hansen, Maryanne M. MowenPublisher:Cengage Learning