ACCT 201 Principles of Financial Accounting Practice Exam - Chapter 4 Reporting & Analyzing Merchandising Activities Dr. Fred Barbee Solution to Short-Problem #2

Short Problem #2

The following information is available for PDQ-Mart and its two main competitors in the industry (XYZ-Mart and ABC-Mart).

	PDQ-Mart	XYZ-Mart	ABC-Mart
Cash	$9,800	$10,500	$26,500
Accounts Receivable	12,500	8,500	14,350
Merchandise Inventory	30,150	40,000	40,150
Prepaid Expense	900	6,750	2,450
Accounts Payable	19,400	13,750	26,800
Salaries Payable	1,200	3,500	6,250
Other Current Payables	600	1,200	2,150

The industry standard for the current ratio is 1.8 to 1 and the industry standard for the acid-test ratio is 1 to 1.

Required:

1. Calculate the current ratio and acid-test ratio for each firm.
2. Rank the firms in decreasing order of liquidity.

Solution

       Classify and total Current Assets and Current Liabilities

	PDQ-Mart	XYZ-Mart	ABC-Mart
Cash	$9,800	$10,500	$26,500
Accounts Receivable	12,500	8,500	14,350
Merchandise Inventory	30,150	40,000	40,150
Prepaid Expense	900	6,750	2,450
Total Current Assets	$53,350	65,750	$83,450

	PDQ-Mart	XYZ-Mart	ABC-Mart
Accounts Payable	19,400	13,750	26,800
Salaries Payable	1,200	3,500	6,250
Other Current Payables	600	1,200	2,150
Total Current Liabilities	$21,200	$18,450	$35,200

       Calculate the Current Ratios

PDQ-Mart

$53,350/$21,200 = 2.52 to 1

XYZ-Mart

$65,750/$18,450 = 3.56 to 1

ABC-Mart

$83,450/$35,200 = 2.37 to 1

       Calculate the Acid-Test Ratios

       Calculate quick assets for acid-test ratios

	PDQ-Mart	XYZ-Mart	ABC-Mart
Cash	$9,800	$10,500	$26,500
Accounts Receivable	12,500	8,500	14,350
Total Quick Assets	$22,300	$19,000	$40,850

PDQ-Mart

$22,300 / $21,200 = 1.05 to 1

XYZ-Mart

$$19,000 / $18,450 = 1.03 to 1

ABC-Mart

$40,850 / $35,200 = 1.16 to 1

       Rank the firms in decreasing order of liquidity

Current Ratio
XYZ-Mart	3.56 to 1
PDQ-Mart	2.52 to 1
ABC-Mart	2.37 to 1
Industry Average	1.8 to 1

Acid-Test Ratio
ABC-Mart	1.16 to 1
PDQ-Mart	1.05 to 1
XYZ-Mart	1.03 to 1
Industry Average	1.00 to 1