Mondale Motors has forecasted the following year-end balance sheet:
Cash and marketable securities $ 300
Accounts receivable $700
Total current assets $1,500
Net fixed assets $5,000
Total assets $6,500
Liabilities and Equity:
Notes payable $ 800
Accounts payable $400
Total current liabilities $1,200
Long-term debt $3,000
Stockholders' equity $2,300
Total liabilities and equity $6,500
The company also forecasts that its days'? sales outstanding (DSO) on a 365-day basis will be 35.486 days. Now, assume instead that Mondale is able to reduce its DSO to the industry average of 30.417 days without reducing its sales. Under this scenario, the reduction in accounts receivable would generate additional cash. This additional cash would be used to reduce its notes payable. If this scenario were to occur, what would be the company's current ratio?
Current Ratio is given as the current assets divided by the current liabilities of the company. It is calculated to find out the position of the company to pay off all its current liabilities with the current assets.
Answer and Explanation:
Days Sales Outstanding = 365 x Receivables / Sales
35.486 = 365 x 700 / Sales
Sales = $7,200.00
New DSO = 30.417 days
Sales = $7,200.00
New Receivables = $600.00
Excess Cash generated = $100.00
New Notes payable balance = $800 - $100 = $700.00
New Current Assets = $1,500 - $100.00 = $1,400.00
New Current Liabilities = $1,200 - $100.00 = $1,100.00
Current Ratio = 1400 / 1100 = 1.27
Learn more about this topic:
from Introduction to Business: Homework Help ResourceChapter 22 / Lesson 26
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