Instructions

a. Calculate Shan Tung's current ratio for each of the three years in order to demonstrate that management's expectation has been met.

b. Calculate Shan Tung's accounts receivable turnover for 2015 and 2014.

c. Calculate Shan Tung's inventory turnover for 2015 and 2014.

d. Using the outcome of b. and c., evaluate whether the achievement of the current ratio targets indicates an improved liquidity or not. Identify any other change that has contributed to meeting this goal and evaluate the impact.

e. Calculate the Acid Test Ratio. Will this ratio always be lower than the current ratio?

Shan Tung Merchandising Ltd. is required by its primary lender to maintain a current ratio of 2:1 in order to comply with its loan covenants. In the past, Shan Tung has had difculty in achieving this target, but management is condent that in 2015 they will have met the bank's requirement. Shan Tung's accountant provides you with the following information taken from their most recent three years of nancial statements. 2015 2014 2013 Current assets Cash $ 26,505 $ 28,500 $ 30,000 Accounts receivable 83,504 68,446 60,040 Inventory 189,266 146,718 125,400 $ 299,275 $ 243,664 $ 215,440 Current liabilities Accounts payable $ 91,000 $ 89,000 $ 86,000 Salaries payable 4,900 5,200 5,000 Current portion of 24,000 36,000 36,000 long-term debt $ 119,900 $ 130,200 $ 127,000 Other information: Credit sales in the $ 782,775 $ 745,500 $ 710,000 year Cost of goods sold 469,665 447,300 426,000 Instructions a. Calculate Shan Tung's current ratio for each of the three years in order to demonstrate that management's expectation has been met. b. Calculate Shan Tung's accounts receivable turnover for 2015 and 2014. Calculate Shan Tung's inventory turnover for 2015 and 2014. Using the outcome of b. and c., evaluate whether the achievement of the current ratio targets indicates an improved liquidity or not. Identify any other change that has contributed to meeting this goal and evaluate the impact. e. Calculate the Acid Test Ratio. Will this ratio always be lower than the current ratio? 9.0