Mondale Motors has forecasted the following year-end balance sheet: Assets: Cash and marketable...

Question:

Mondale Motors has forecasted the following year-end balance sheet:

Assets:

Cash and marketable securities $ 300

Inventories $500

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:

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

or,

35.486 = 365 x 700 / Sales

Hence,

Sales = $7,200.00

Now,

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:

Current Ratio in Accounting: Definition, Formula & Analysis

from Introduction to Business: Homework Help Resource

Chapter 22 / Lesson 26
5.4K

Related to this Question

Explore our homework questions and answer library