FIN 018 PROBLEM SOLVING CURRENT LIABILITIES

PROBLEM #2 ACCOUNTS PAYABLE 80,000

Erica Trading Corp had a net income of 2 Million in 2017. Using INTEREST PAYABLE, DUE IN 3 MONTHS 25,000
the 2017 financial elements as the base data, net income NOTES PAYABLE, DUE IN 6 MONTHS 250,000
decreased by 40% in 2018 and increased by 125% in 2019.
1. The net income reported by the company for 2018 is SOLUTION:
SOLUTION: CURRENT RATIO = 740,000 / 355,000
2,000,000 * (100% - 40%) = 1,200,000 = 2.084
2. The net income reported by the company for 2019 is
SOLUTION: 2. QUICK RATIO = CASH + MARKET SECURITIES + ACC. RECEIVABLE
2,000,000 * (100* +125%) = 4,500,000 CURRENT LIABILITIES
CASH 100,000
PROBLEM #3 ACCOUNTS RECEIVABLE 200,000
The following financial data have been taken from the records
of Salido Company SOLUTION
ACCOUNTS RECEIVABLE 200,000 QUICK RATIO = 300,000 / 355,000
= 0.8451
ACCOUNTS PAYABLE 80,000
BONDS PAYABLE, DUE IN 10 YRS 500,000
*If the inventory amounting to 50,000 was sold with 40 %
CASH 100,000
markup on cost, compute for
INTEREST PAYABLE, DUE IN 3 MONTHS 25,000
3. CURRENT RATIO
INVENTORY 440,000
50,000 * .40 = 20,000
LAND 800,000
NOTES PAYABLE, DUE IN 6 MONTHS 250,000 CURRENT ASSET = 740,000 + 20,000 = 760,000
1. CURRENT RATIO = CURRENT ASSET/ CURRENT LIABILITIES SOLUTION:
CURRENT ASSETS: CURRENT RATIO = 760,000 / 355,000
ACCOUNTS RECEIVABLE 200,000 = 2.1408
CASH 100,000
INVENTORY 440,000
4. QUICK RATIO
50,000 * .40 = 20,000 ACCOUNTS PAYABLE 145,000
50,000 + 20,000 = 70,000 ACCRUED LIABILITIES 4,000
INCOME TAX PAYABLE 10,000
QUICK ASSET = 300,000 + 70,000 = 370,000 NOTES PAYABLE, DUE IN 3 MONTHS 85,000
SOLUTION:
QUICK RATIO = 370,000 / 355,000 SOLUTION
= 1.0423 WORKING CAPITAL = 595,000 - 244,000
= 351,000
PROBLEM #4 2. The amount of quick assets is
Mariano Corp had the following data in its balance sheet on ACCOUNTS RECEIVABLE 110,000
December 31,2016: CASH 80,000
ACCOUNTS PAYABLE 145,000 MARKETABLE SECURITIES 250,000
ACCOUNTS RECEIVABLE 110,000 QUICK ASSETS 440,000
ACCRUED LIABILITIES 4,000
CASH 80,000 PROBLEM #5
INCOME TAX PAYABLE 10,000 During 2019, Salas Company purchased 520,000 of inventory.
INVENTORY 140,000 The cost of goods sold fro 2019 was 480,000, and the inventory
MARKETABLE SECURITIES 250,000 on December 31, 2019 was 180,000
NOTES PAYABLE, DUE IN 3 MONTHS 85,000
PREPAID EXPENSES 15,000 1. What was the inventory turnover for 2019?
INV. TO = COGS/ AVERAGE INVENTORY
1. The amount of working capital is COGS = 480,000
CURRENT ASSET : AVERAGE INVENTORY =160,000
ACCOUNTS RECEIVABLE 110,000
CASH 80,000 SOLUTION:
INVENTORY 140,000 INV. TO = 480,000 / 160,000
MARKETABLE SECURITIES 250,000 =3
PREPAID EXPENSES 15,000

CURRENT LIABILITIES: FIND BEGINNING INVENTORY:

BEGINNING INVENTORY 140,000 (MISSING) Selected information for Trieyt Corp as December 31, 2019 is
PURCHASED 520,000 as follows:
ENDING INVENTORY 180,00 2018 2019
COGS 480,000 PREFERRED STOCK, 8% PAR P100 250,000 250,000
NOTE: REVERSE COMPUTATION NONCONVERTIBLE AND NON
COMULATIVE
2. DAYS IN INVETORY IS COMMON STOCK 600,000 800,000
AVE. SELLING PERIOD = 365 / 3 REATINED EARNINGS 150,000 370,000
= 121.67 or 122 days DIVIDENDS PAID ON PREFERRED 20,000 20,000
3. The times interest earned ration of Salas Company was 3.25 STOCK FOR THE YEAR
times. The interest expense for the year was 30,000 and the NET INCOME 120,000 240,00
company’s tax rate is 40%. what was company’s net income?
1. What was the return on common stockholders for 2019?
TIER = EBIT / INTEREST EXPENSE ROE = NICS / AVERAGE STOCKHOLDERS
= EBIT /30,000 NICS= 240,000 - 20,000 = 220,000
= 3.5 AVE. STOCKHOLDERS = (750,000 + 1,170,00)/ 2 = 960,000
EBIT = 30,000 * 3.25 2018 = 600,00 + 150,000
= 97500 2019 = 800,000 + 370,000

EBIT 97500 PROBLEM #7

INTEREST EXPENSE (30,000) On December 31, 2018 and 2019,Tripiptin Corporation had
EARNING BEFORE TAXES 67,500 100,000 shares of common stock and 50, 000 shares of
TAXES- 40% = 67,500 * .40 (27,000) noncomulative and nonconvertible preferred stock issued and
NET INCOME 40,500 outstanding. Additional information are as follows:
STOCKHOLDERS EQUITY 2019 4,500,000
NET INCOME 2019 1,200,000
DIVIDENDS ON PREFERRED STOCK 300,000
MARKET PRICE PER SHARE OF COMMON 144
STOCK
PROBLEM #6 SOLUTION:
PER = MPS / EPS CURRENT RATIO =2
= 144 / EPS QUICK RATIO =(1.25)
=? INVENTORY = 0.75
EPS= NICS / # OF SHARES SOLUTION:
NICS: 1,200,000 - 300,000 = 900,000 = 1,120,000 * 0.75
COMMON STOCKS = 100,000 = 840,000

EPS = 900,000 / 100,000 2. CASH CONVERSION CYCLE

= 9 PER SHARE = ASP + ACP - APP
ASP =360/ 5
PER = MPS / EPS ACP= 42
= 144 / 9 APP= 360/10
= 16
= 72 +42 - 36
PROBLEM #8 = 78 DAYS
The current assets of Trisikstin Company Enterprise consist of
cash, accounts receivable and inventory. The following PROBLEM #9
information is available. The December 31, 2019 balance sheet of RCR Company is
CREDIT SALES 75% of total sales presented below. These are the only accounts in RCR’s balance
INVENTORY TURNOVER 5 times sheet.
WORKING CAPITAL 1,120,000 CASH 25,000
CURRENT RATIO 2 to 1 ACCOUNTS RECEIVABLE ?
QUICK RATIO 1.25 to 1 INVENTORY ?
AVERAGE COLLECTION PERIOD ACC. 42 days PLANT AND EQUIPMENT 294,000
PAYABLE TOTAL ASSETS 432,000
TURNOVER 10 times
WORKING DAYS 360 days

1. The estimated inventory amount. ACCOUNTS PAYABLE ?

INCOME TAXES PAYABLE 20,000 2. What was RCR’s December 31, 2019 balance in Accounts
LONG TERM DEBT 100,000 Receivable?
COMMON STOCK 200,000 CASH 25,000
RETAINED EARNINGS ? ACCOUNTS RECEIVABLE 33,000
TOTAL LIABILITIES AND EQUITY ? INVENTORY 80,000
PLANT AND EQUIPMENT 294,000
ADDITIONAL INFORMATION: TOTAL ASSETS 432,000
CURRENT RATIO ( AT YEAR END) 1.5 to 1 SOLUTION:
DEBT TO EQUITY RATIO 0.8 =432,000 - 294,000 - 80,000 - 25,000
INV. TO BASED ON SALES AND ENDING INV. 15 times = 33,000
INV.TO BASED ON COGS AND ENDING INV. 11 times
GROSS MARGIN FOR THE YEAR 320,000 3. What was RCR’s December 31, 2019 balance in Retained
Earnings?
1. What was RCR’s December 31, 2019 balance in inventory ? ACCOUNTS PAYABLE 72,000
INV. TO BASED ON SALES AND ENDING INV. 15 times INCOME TAXES PAYABLE 20,000
INV.TO BASED ON COGS AND ENDING INV. 11 times LONG TERM DEBT 100,000
COMMON STOCK 200,000
SOLUTION: RETAINED EARNINGS 40,000
INV. TO BASED ON SALES AND ENDING INV. 15 times TOTAL LIABILITIES AND EQUITY 432,000
INV.TO BASED ON COGS AND ENDING INV. (11 times)
INV. TO BASED ON GROSS PROFIT 4 TIMES SOLUTION:
ACCOUNTS PAYABLE = ?
INVENTORY = GROSS MARGIN OF THE YEAR CURRENT RATIO = CA/CL
INV. TO BASED ON GROSS PROFIT CURRENT RATIO = 138,000 /CL
INVENTORY = 320,000 / 4 CURRENT RATIO = 1.5
= 80,000
CURRENT LIABILITY = 138,000 / 1.5
CURRENT LIABILITY = 92,000
ACCOUNTS PAYABLE = ? (5:1)
CURRENT LIABILITY = 92,000 CA/CL =5
INCOME TAXES PAYABLE (20,000) = 60,000 - X = 5
ACCOUNTS PAYABLE 72,000 20,000 - X

RETAINED EARNINGS = 60,000 - X = (20,00 - X) 5

= 432,000 - 200,000 - 100,000 - 20,000 - 72,000 = 60,000 - X = 100,000 - 5X
= 40,000 = 5X - X = 100,000 - 60,000
= 4X = 40,000
PROBLEM #10 4
Cedric Corp has a current ratio of 3:1. the minimum desired ratio = 10,000
is 5:1. at present, the net working capital is 40,000.
PROBLEM #11
1. How much current liabilities must be paid to achieve the Abokoutah Company reported of cost of goods sold of 250,000
minimum current ratio ? and operating expenses of 150,000 (including depreciation of
SOLUTION: 20,000). Income taxes are 35 %. The after tax return on sales is
(3:1) 23.4%.
CA/ CL = 3
CA= 3CL 1. How much was the sales revenue?
ACCOUNTS PAYABLE SOLUTION:
WORKING CAPITAL SALES X
= CA-CL = 40,000 COGS 250,000
=3CL - CL =40,000 OPERATING EXPENSES 150,000
= 2CL = 40,000 OPERATING INCOME X - 400,000
2 INCOME TAXES (100-35) 65%
CL = 20,000 NET INCOME 0.234X
CA= 3(20,000)
CA= 60,000
= (X - 400,000) 0.65 = .234X
= 0.65x - 260,000 = 0.234x
= 0.65x - 0.234x = 260,000
=0.416x =260,000
0.416
= 625,000

CHECKING:
SALES 625,000
COGS 250,000
OPERATING EXPENSES 150,000
OPERATING INCOME X - 400,000
INCOME TAXES (100-35) 65%
NET INCOME 0.234X

OPERATING INCOME = 225,000 * 0.65 = 146, 250

CHECKING NET INCOME = 0.234 OR 23.4%

= 146,250
625,000
= 0.234 (CORRECT)