Liquidity Ratios

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Of the firm 's sales, 40 percent are for cash and the remaining 60 percent are on credit. Of credit sales, 40 percent are paid in the month after sale and 30 percent are paid in the second month after the sale. Materials cost 30 percent of sales and are purchased and received each month in an amount sufficient to cover the following month 's expected sales. Materials are paid for in the month after they are received. Labor expense is 40 percent of sales and is paid for in the month of sales. Selling and administrative expense is 5 percent of sales and is also paid in the month of sales. Overhead expense is $28,000 in cash per month. |
Problem 25 /Page 116 Depreciation expense is $10, 00 per month. Taxes of $8, 00 will be paid
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And also this may be result from a high return on total assets, or utilization of debt or combination of both.
Johns Corporation turns over its inventory 25 times per year comparing to Smith corporation of 13 times per year, this means that Johns Corp generate more sales per dollar of inventory than Smith Company.
Johns Corp Turnover their asset 2.5 times a year, which means Johns Corp, has been able to turn a profit to good return on assets.
Both Companies have been successful in maintaining more assets than liabilities thus, Both has been successful in sustaining quick ratio above 1.0 ,Thus ensuring that Cash, Cash Equivalents and account receivables are more than liabilities at the end of financial year. John’s assets turnover is more than Smith Corp, which shows the management capabilities of effectively utilizing their assets to generate revenues. For Smith Corporation the times interest earned is lower than johns, this can be caused by lower income, higher debt, or a combination of both.
Times earnest earned indicates the number of times that income before tax and interest covers the interest obligation (6) times .The higher the ratio the stronger is the interest-paying ability of the firm.
Johns Corporation has a debt of Equity rate less than Smith Corporation, which
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