The Test Today

For some of us in this part of the world, we took the test prior to all of you, Zone B, anyways the accounting test was 1/3 easy, 1/3 medium (if you studied haphazardly you should be able to answer) and 1/3 was ridiculously hard (for me that is)

I kept emphasizing on my accounting blog, to know your financial statements, and how to fill it out:

1. Balance Sheet
2. Income Statement (sorry I'm a little old school and US centric on this one)
3. Cash Flow Statement
4. Operations Statement

Some points of the test!!!

A) Know what principles/theories, etc and the advantages and disadvantages

B) Calculation of ratios (PE, turnover, etc)

C) Compare 2 businesses and do all the formulas and advise which one is the better buy.

Bank Reconciliation

If you know how to do these at least halfway decently you should be able to pass.

If you don't know anything, at least memorize all the principles/theories and know how to fill out a Balance Sheet, Income Statement and know how to do a bank reconciliation.

If you don't know how to do those by now, you're in big trouble.

A/R Analysis

Accounts Receivable Analysis (How credit is managed)

• A/R Turnover
  
• Number of Days Sales in A/R
  
• Estimate number of days of A/R to Cash
  

	2009	2008
Accounts Receivable, end of year	$222,466	$235,068
Monthly Average Accounts Receivable (net)	207,143	216,667
Net Sales	1,450,000	1,300,000

 

Terms of sales are 1/10 (1% discount, if paid within 10 days), and n/60 (net 60, net due within 60 days)

 

a) Determine for each year (1) The accounts receivable turnover and (2) the number of days sales in receivables.

 

b) What conclusions can be drawn from these data concerning accounts receivables and credit policies?

 

First: Accounts Receivable Turnover Formula

 

Net Sales divided by Average A/R

 

2009		2008
Net Sales	1,450,000	1,300,000
Div by Avg A/R	207,143	216,667
Total	7	6

 

That means the ratio of how much the A/R turnovers is 7 times a year

 

Second: Number of Days Sales in A/R

 

Accounts Receivable @ the End of the Year divided by Average Daily sales

 

2009		2008
A/R @ EOY	207,143	216,667
Div by Avg Daily A/R	(1,450,000/365) = 3,973	(1,300,000/365) = 3,562
Total	56 days	66 days

 

Current Position Analysis

Solvency Ratios:

Current Position Analysis

1. Working capital 

Formula = current asset – current liabilities

2. Current Ratio – Let's you know how many times current assets can cover current liabilities

Current Assets/Current Liabilities (current assets divided by current liabilities)

3. Acid Test Ratio aka Quick Test (to show how quickly a business can fulfill its obligations, simply put how quickly they can pay off debt if they had to)

Quick Assets/Current liabilities (quick assets – cash/securities, etc divided by current liabilities.

	Current Year	Preceding Year
Cash	$280,000	$265,000
Marketable Securities	131,000	121,000
Accounts & Notes Rec (net)	395,000	384,000
Inventories	570,000	555,000
Prepaid Expenses	19,000	40,000
Account & Notes Payable (net)	250,000	285,700
Accrued Liabilities	60,000	64,300

Current Assets in blue

Current Liabilities in green

a) determine for each year (1) the working capital (2) the current ratio & (3) the acid-test ratio.

b) What conclusions can be drawn from these data as to the company's ability to meet its currently maturing debts?

Let's do this: For the sake of simplicity, let's use 2009 & 2008

1. Working capital

	2009	2008
Assets	$1,395,000	$1,365,000
Liab	-310,000	-350,000
Total	$1,085,000	$1,015,000

2. Current Ratio

	2009	2008
Assets	$1,395,000	$1,365,000
Liab	Divide by 310,000	Divide by 350,000
Total	4.5	3.9

This means in 2009, current obligations can bet met 4.5 times compared to 3.9 times in the preceding year. 

3. Acid Test

Quick Assets = Cash, Marketable Securities, Receivables divided by current liabilities

	2009	2008
Quick Assets	$806,000	$770,000
Liab	Divided by 310,000	Divided by 350,000
Total	2.6	2.2

 

This means that 2008 the quick assets could cover the liabilities 2.2 times and in 2009, it improved to 2.6