# How do financial analysts use the quick ratio?

How do financial analysts use the quick ratio?.

Common stock \$200,000
Using the information provided in the table, complete the following:
1. Compute (a) working capital and (b) the quick ratio (quick assets are \$120,000).
1. Why is working capital important to management?
2. How do financial analysts use the quick ratio?
3. Would your computations be different if the company reported \$250,000 worth of contingent liabilities in the notes to the statements? Explain. Include in your explanation a definition of contingent liabilities and an example of a contingent liability.
Problem 2: Reading Publically Available Financial Statements
Refer to the Lowes 2011 10-K. You should have located these statements for previous assessment problems. Use these statements and your prior knowledge of accounting, supplemented by textbooks or other references of your choosing, including the NOTES to the financial statements found in the Lowes 2011 10-K, to answer the following questions, which all refer to the fiscal year end 2012. Indicate the source of each answer, including the page number from the Lowes 2011 10-K.
1. How many shares of common stock are authorized at the end of the current year? How many shares are issued and outstanding at the end of the current year?
2. Is there more than one class of common stock? If so, what is the name of each class of common stock?
3. Is there any preferred stock? If so, what is the dividend rate on the preferred stock, as a percentage of the par value of the preferred stock?
4. Did the company pay dividends on the common stock during the most recent reporting year? If so, what was the total amount of dividends paid and how much were they per share?
5. Does the company have any treasury stock? If so how much?
6. Has the company issued a stock dividend or a stock split over the past three reporting years? If so, what percentage and in what year or years?
7. Does the companys common stock have par value? If it does, what is the par value?
8. Did the common buy back a significant amount of its shares in the current year? You can see this in the Statement of Stockholders Equity as a reduction in shares.
Problem 3: Comprehensive Problem 2
Bring together various financial analysis measures and interpret their meaning in order to draw conclusions about various companies.
Note that each situation provided is to be considered independently of the others.
Situation A: The following tables represent selected data from recent financial statements of Lincoln and Samuelson, Inc. (dollars in thousands of dollars):
Problem 3, Table 1: Lincoln and Samuelson, Inc. Selected Items from Balance Sheets
Assets (in thousands) December 31, 2012 December 31, 2011
Current assets: Cash and cash equivalents \$4,000 \$3,400
Accounts receivable (net of allowances of \$32 and \$28, respectively) \$6,500 \$5,700
Selected Income Statement Data for the Year Ended December 31
Problem 3, Table 2: Lincoln and Samuelson, Inc. Selected Income Statement Data
Account 2012 2011 2010
Net sales (in millions) \$6,020 \$5,425 \$5,000
Net income (in millions) \$300 \$285 \$220
The company also reported bad debt expense of \$62,000 in 2012; \$55,000 in 2011; and \$49,500 in 2010.
Using the data provided, complete the following for Lincoln and Samuelson, Inc.:
1. Compute the dollar amount of uncollectible accounts receivable that the company wrote off as uncollectible in 2012. Show all of your work.
2. Assuming all sales were on credit, what amount of cash did the company collect on accounts receivable in 2012? Show all of your work.
3. Compute the companys net profit margin for the three years presented. What does the trend suggest to you about the company?
Situation B: The Israel Manners Entertainment Group uses the allowance approach to estimate bad debt expense, as is required of all companies with significant sales on accounts receivable. At the end of 2012, the Manners Group reported a balance in accounts receivable of \$4,350,000 and estimated that \$44,000 of its accounts receivable would likely be uncollectible. The allowance for doubtful accounts has a \$1,500 debit balance at year-end, prior to the adjustment needed to raise it to the \$44,000 desired amount. Use this information to answer the following questions:
1. How is it possible that the allowance for doubtful accounts has developed a debit balance instead of a credit balance?
2. What amount of bad debt expense should be recorded for 2012?
3. What amount will be reported on the 2012 balance sheet as the net realizable amount of accounts receivable?
Situation C: At the end of 2012, the unadjusted trial balance of Donovan, Inc. included \$6,000,000 in accounts receivable, a credit balance of \$50,000 in the allowance for doubtful accounts, and sales revenue (all on credit) of \$200,000,000. Based on knowledge that the current economy is in distress, Donovan increased its bad debt rate estimate to 0.4 percent on credit sales. Use this information to answer the following:
1. What amount of bad debt expense should be recorded for 2012?
2. What amount will be reported on the 2012 balance sheet for the net realizable amount of accounts receivable, after being reduced by the balance in the allowance for uncollectible accounts?
Situation D: BrightStar Company reported the following inventory records for June, 2012:
Problem 3, Table 3: BrightStar Company Inventory Records
Date Activity # of Units Cost/Unit
June 1 Beginning balance 200 \$40
June 5 Purchase 600 \$42
June 8 Sale @ \$100 per unit 500
June 17 Purchase 400 \$45
June 23 Sale @ \$100 per unit 500
Selling, administrative, and depreciation expenses for the month were \$20,000. BrightStars tax rate is 35 percent. Use this information and the table above to complete the following:
1. Calculate the cost of ending inventory and the cost of goods sold under each of the following methods:
1. First-in, first-out.

How do financial analysts use the quick ratio?

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