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The following selected information is taken from the financial statements of Arnn Company for its most recent year of operations:

Beginning balances:

• Inventory: $200,000
• Accounts Receivable: $300,000

Ending Balances:

• Inventory: $250,000
• Accounts Receivable: $400,000
• Cash: $100,000
• Marketable securities (short-term): $200,000
• Prepaid Expenses: $50,000
• Accounts Payable: $175,000
• Taxes Payable: $85,000
• Wages Payable: $90,000
• Short-term Loans Payable: $50,000

During the year, Arnn had:

• Net Sales: $2,450,000
• COGS: $1,300,000

Required:

1. Compute the current ratio.
2. Compute the Quick or Acid-Test Ratio.
3. Compute the Accounts Receivable Turnover.
4. Compute the Accounts Receivable Turnover in Days.
5. Compute the Inventory Turnover.
6. Compute Inventory Turnover in Days.

Round all answers to two decimal places and format as either a number or dollar amount. To receive full points, show your work and label the amounts used in your calculations.

Paper For Above Instructions

Financial ratios are essential tools for assessing the financial health of a company. They provide insights into aspects such as liquidity, efficiency, and profitability. This analysis focuses on Arnn Company, utilizing the provided financial data to compute six critical ratios: the current ratio, quick ratio, accounts receivable turnover, accounts receivable turnover in days, inventory turnover, and inventory turnover in days.

Current Ratio

The current ratio measures a company's ability to pay short-term obligations with its current assets. It is calculated using the formula:

Current Ratio = Current Assets / Current Liabilities

From the data:

• Current Assets:

• Cash: $100,000
• Accounts Receivable: $400,000
• Inventory: $250,000
• Marketable Securities: $200,000
• Prepaid Expenses: $50,000

Total Current Assets = $100,000 + $400,000 + $250,000 + $200,000 + $50,000 = $1,000,000

• Current Liabilities:

• Accounts Payable: $175,000
• Taxes Payable: $85,000
• Wages Payable: $90,000
• Short-term Loans Payable: $50,000

Total Current Liabilities = $175,000 + $85,000 + $90,000 + $50,000 = $400,000

Current Ratio = $1,000,000 / $400,000 = 2.50

Quick Ratio

The quick ratio, also known as the acid-test ratio, excludes inventory from current assets. It measures the ability to meet short-term obligations with the most liquid assets.

Quick Ratio = (Current Assets - Inventory) / Current Liabilities

Quick Assets = Current Assets - Inventory = $1,000,000 - $250,000 = $750,000

Quick Ratio = $750,000 / $400,000 = 1.88

Accounts Receivable Turnover

This ratio indicates how efficiently a company collects its receivables. It is calculated using net sales and average accounts receivable.

Accounts Receivable Turnover = Net Sales / Average Accounts Receivable

Average Accounts Receivable = (Beginning AR + Ending AR) / 2 = ($300,000 + $400,000) / 2 = $350,000

Accounts Receivable Turnover = $2,450,000 / $350,000 = 7.00

Accounts Receivable Turnover in Days

This figure measures the number of days it takes to collect on receivables.

Accounts Receivable Turnover in Days = 365 / Accounts Receivable Turnover

Accounts Receivable Turnover in Days = 365 / 7.00 = 52.14 days

Inventory Turnover

This ratio shows how many times a company sells and replaces its inventory in a certain period.

Inventory Turnover = COGS / Average Inventory

Average Inventory = (Beginning Inventory + Ending Inventory) / 2 = ($200,000 + $250,000) / 2 = $225,000

Inventory Turnover = $1,300,000 / $225,000 = 5.78

Inventory Turnover in Days

This calculation indicates the average number of days to sell the entire inventory.

Inventory Turnover in Days = 365 / Inventory Turnover

Inventory Turnover in Days = 365 / 5.78 = 63.00 days

Summary of Calculations

• Current Ratio: 2.50
• Quick Ratio: 1.88
• Accounts Receivable Turnover: 7.00
• Accounts Receivable Turnover in Days: 52.14 days
• Inventory Turnover: 5.78
• Inventory Turnover in Days: 63.00 days

Conclusion

The analysis of Arnn Company’s financial data reveals crucial insights regarding its liquidity and operational efficiency. With a current ratio of 2.50, the company has a strong capability to meet its short-term liabilities. The quick ratio of 1.88 further confirms that the company can cover its current obligations without relying heavily on inventory. High turnover ratios suggest effective management of receivables and inventory, indicating operational efficiency. Understanding these metrics is vital for stakeholders assessing Arnn Company's financial stability.

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