Kaplan Gb518 Essay

893 WordsNov 6, 20124 Pages
Case Study Decision case 13-5: Acquisition Case GB518 Financial Accounting Principles and Analysis 1. To determine the liquidity of Heavy Duty Tractors the following measures were used. * The working capital was calculated by subtracting current liabilities from current assets. Working capital 2007: $215,180,000 - $126,250,000 = $88,930,000 Working capital 2008: $324,120,000 - $162,300,000 = $161,820,000 From this, we can see between the two years the working capital almost doubled between 2007 and 2008. * The current ratio = Current asset/Current liabilities Current ratio 2007 = $215,180/$126,250 =1.70 to 1 Current ratio 2008 = $324,120/$162,300 = 2.00 to 1 Between the years of 2007 and 2008, the current ratio increased. In the year, 2007 Heavy Duty Tractors had $1.70 of assets for every dollar of liabilities. In 2008, they had $2.00 of assets for every dollar of liabilities. * Quick ratio = (Cash + Market Securities +Current Receivables)/ Current liabilities Quick ratio 2007 = ($24,980 +$0 + $84,120)/$126,250 = 0.86 to 1 Quick ratio 2008 = ($48,500 +$3,750 + $128,420)/$162,300 = 1.11 to 1 This ratio also increased between the years of 2007 and 2008. For the year 2007 the ratio was less than 1 meaning it needed to liquidated it marketing securities in that year, to pay bills. In year 2008, the ratio increased over one and hence there was not a need to liquidate its securities. * Acc receivable turnover ratio = Net credit Sales/ Average accounts receivable Acc receivable turnover 2008 = $875,250/ (($84,120+$128,420)/2) =8.24 times Average collection period = 360days/ 8.24 = 44 days We would need to know the credit policy of the company to determine if this collection period is reasonable. * Inventory turnover = Cost of goods sold/ Average inventory Inventory turnover 2008 = $542,750/ (($96,780+$135,850) = 4.67

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