Question 1

Shown below are selected financial data for AB and XY Limited at the end of the current year:

AB Ltd XY Ltd

Net credit sales $675,000 $560,000

Cost of goods sold 504,000 480,000

Cash 51,000 20,000

Accounts receivable 75,000 70,000

Inventory 84,000 160,000

Current liabilities 105,000 100,000

Required:

a) For each of the two companies, compute the following:

1. Working capital

2. Current ratio

3. Quick ratio

4. Inventory turnover ratio and average number of days required to turn over inventory

5. Accounts receivable ratio and average accounts receivable collection period.

b) From the viewpoint of a short-term creditor, comment on the quality of each companys working capital. To which company would you prefer to sell $20,000 in goods on a 30-day open account?