Chapter 15, Problem 4SEA

### College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756

Chapter
Section

### College Accounting, Chapters 1-27

23rd Edition
HEINTZ + 1 other
ISBN: 9781337794756
Textbook Problem

# FINANCIAL RATIOS Based on the financial statements for Jackson Enterprises (income statement, statement of owner’s equity, and balance sheet) shown on pages 596–597, prepare the following financial ratios. All sales are credit sales. The Accounts Receivable balance on January 1, 20--, was $21,600. 1. Working capital 2. Current ratio 3. Quick ratio 4. Return on owner’s equity 5. Accounts receivable turnover and average number of days required to collect receivables 6. Inventory turnover and average number of days required to sell inventory To determine Compute the following financial ratios: 1. 1. Working capital 2. 2. Current ratio 3. 3. Quick ratio 4. 4. Return on owner’s equity 5. 5. Accounts receivable turnover and average number of days require to collect receivables. 6. 6. Inventory turnover and average number of days required to sell inventory Explanation Ratio analysis: The analysis of a company using the financial ratios and comparing its trends and measure its performance within the company and the companies of the industry is known as ratio analysis. The main categories of ratio analyses are liquidity ratios, profitability ratios, activity ratios, and leverage ratios. 1. Compute working capital. WorkingÂ capitalÂ =â€‰CurrentÂ assetsÂ âˆ’CurrentÂ liabilites=â€‰$70,100Â âˆ’$15,100=â€‰$55,000

2.

Compute current ratio.

CurrentÂ ratioÂ =â€‰CurrentÂ assetsCurrentÂ liabilities=â€‰$70,100$15,100=â€‰4.64â€‰toâ€‰1

3.

Compute quick ratio.

QuickÂ ratioÂ =â€‰QuickÂ assetsCurrentÂ liabilites=â€‰($20,800+18,900)$15,100=â€‰2.63â€‰toÂ 1

4.

Compute return on ownersâ€™ equity.

ReturnÂ onÂ owners'Â equityâ€‰=â€‰NetÂ incomeAverageÂ owners'Â equity=â€‰$27,800($88,000â€‰+$104,200)2=â€‰$27,800\$96,100=â€‰28.9%

5.

Compute accounts receivable turnover

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