Chapter 8, Problem 8.40BP

(1)(a)

To determine

Acid-test ratio:

The financial ratio which evaluates the ability of a company to pay all of its current liabilities, if they came due immediately is referred to as acid-test ratio.

To compute: B Cosmetic Supply’s acid-test ratio for 2016 and 2015.

(1)(b)

To determine

Accounts receivable turnover:

Accounts receivable turnover is a liquidity measure of accounts receivable in times, which is calculated by dividing the net credit sales by the average amount of net accounts receivables. In simple, it indicates the number of times the average amount of net accounts receivables collected during a particular period.

To calculate: B Cosmetic Supply’s accounts receivable turnover ratio for 2016 and 2015.

(1)(c)

To determine

Average collection period:

Average collection period indicates the number of days taken by a business, to collect its outstanding amount of accounts receivable on an average.

To calculate: B Cosmetic Supply’s days’ sales in receivables for 2016 and 2015.

(2)

To determine

To identify: Whether each ratio has been improved or deteriorated, and identify whether each ratio’s trend is favorable or unfavorable.