Compute the Liquidity ratios for C Company and P Company

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(a)

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Compute the Liquidity ratios for C Company and P Company

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Liquidity ratios: Liquidity ratios are used to measure the ability of the company towards fulfilling the obligations and requirements of the cash at the short-term. Some of the ratios are current ratio, acid-test ratio, inventory turnover ratio, and accounts receivable ratio.

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Given info: Data from consolidated financial statements.

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(1)

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Current ratio of C Company and P Company

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C Company

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Current\u2009ratio=Current\u2009assetsCurrent\u2009liabilities=$17,551$13,721=1.28:1

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P Company

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Current\u2009ratio=Current\u2009assetsCurrent\u2009liabilities=$12,571$8,756=1.44:1

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Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1

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Formula:

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Currentratio=CurrentassetsCurrent\u2009liabilities

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Thus, current ratio for C Company and P Company is 1.28:1 and 1.44:1 respectively.

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(2)

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Accounts Receivable Turnover Ratio of C Company and P Company

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C Company

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Receivablesturnover\u2009=\u2009NetcreditsalesAveragenetreceivables=\u2009$30,990$3,424=9.1times

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P Company

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Receivablesturnover\u2009=\u2009NetcreditsalesAveragenetreceivables=\u2009$43,232$4,654=9.3times

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Accounts receivable turnover ratio is mainly used to evaluate the collection process efficiency. It helps the company to know the number of times the accounts receivable is collected in a particular time period. Main purpose of accounts receivable turnover ratio is to manage the working capital of the company. Assume all sales are credit sales.

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Formula:

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Accountsreceivablesturnoverratio}=NetcreditsalesAverageaccountsreceivables

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Thus, accounts receivable turnover ratio for C Company and P Company is 9.1 times and 9.3 times respectively.

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(3)

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Average collection period of C Company and P Company

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C Company

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Average\u2009\u2009collection\u2009period=Daysinaccountingperiod(365\u2009days)Accountsreceivablesturnover=365\u2009days9.05\u2009times\u2009(Froma(2))=\u200940.1\u2009days

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P Company

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Average\u2009\u2009collection\u2009period=Daysinaccountingperiod(365\u2009days)Accountsreceivablesturnover=365\u2009days9

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(b)

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Compute the Solvency ratios for C Company and P Company

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(c)

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Compute the Profitability ratios for C Company and P Company

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d)

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Compute the Return on common stockholders’ equity ratio for C Company and P Company

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