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Accounting information is a crucial tool for organizations to make informed decisions about their financial health and performance. In this report, we will analyze the financial data of XYZ Company, a fictional organization, using accounting information to assess its liquidity and efficiency in managing receivables. We will focus on three key financial ratios - Acid-Test Ratio, Days' Sales in Receivables, and Accounts Receivable Turnover Ratio - to gain insights into XYZ Company's financial position.
Let's start by examining the financial data of XYZ Company for the fiscal year 20XX:
| Financial Data | Amount (in dollars) |
|---|---|
| Total Current Assets | 500,000 |
| Total Current Liabilities | 200,000 |
| Cash | 100,000 |
| Short-term Investments | 50,000 |
| Net Current Receivables | 150,000 |
| Net Sales or Total Revenue | 1,200,000 |
The Acid-Test ratio, also known as the Quick Ratio, measures XYZ Company's ability to pay its current liabilities if they were to become due immediately.
Let's calculate the Acid-Test Ratio:
| Formula | Calculation | Result |
|---|---|---|
| Acid-Test Ratio | (Cash + Short-term Investments + Net Current Receivables) / Total Current Liabilities | (100,000 + 50,000 + 150,000) / 200,000 |
| 1.75 |
The Acid-Test Ratio for XYZ Company is 1.75, indicating a strong ability to pay its current liabilities promptly.
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This ratio is well above the safe threshold of 1.00.
Days' Sales in Receivables, or the collection period, reflects how quickly XYZ Company collects its average level of receivables. Let's calculate the Days' Sales in Receivables:
| Formula | Calculation | Result |
|---|---|---|
| One day's sale | Net Sales or Total Revenue / 365 days | 1,200,000 / 365 |
| 3,287.67 | ||
| Days' Sales in Receivables | (Average Net Accounts Receivable / One day's sale) | ((Beginning Net Accounts Receivable + Ending Net Accounts Receivable) / 2) / 3,287.67 |
| 22.83 days |
XYZ Company takes approximately 22.83 days to collect its average level of receivables, indicating efficient management in converting accounts receivable into cash.
The Accounts Receivable Turnover Ratio measures how many times XYZ Company sells and collects the average receivable balance in a year.
Let's calculate the Accounts Receivable Turnover Ratio:
| Formula | Calculation | Result |
|---|---|---|
| Accounts Receivable Turnover | Net Credit Sales / Average Net Accounts Receivable | 1,200,000 / 150,000 |
| 8.00 times |
XYZ Company achieves an Accounts Receivable Turnover Ratio of 8.00 times, indicating that it collects its average receivable balance eight times in a year, demonstrating efficient management of receivables.
Through the analysis of XYZ Company's financial data, we have gained valuable insights into its liquidity and efficiency in managing receivables. With an Acid-Test Ratio of 1.75, XYZ Company has a strong ability to meet its current liabilities. The Days' Sales in Receivables of 22.83 days reflects efficient collection practices, and the Accounts Receivable Turnover Ratio of 8.00 times indicates effective management of receivables. These ratios provide XYZ Company with valuable information to make informed financial decisions and optimize its financial performance.
Using Accounting Information for Decision Making. (2024, Jan 24). Retrieved from https://studymoose.com/document/using-accounting-information-for-decision-making
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