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Liquidity Ratios Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess

Liquidity Ratios

Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess the financial capabilities of the company, Mike has been given the company's financial statements for the 2 most recent years.

Kepler Company
Comparative Balance Sheets
This Year Last Year
Assets
Current assets:
Cash $ 50,000 $100,000
Accounts receivable, net 300,000 150,000
Inventory 600,000 400,000
Prepaid expenses 25,000 30,000
Total current assets $ 975,000 $680,000
Property and equipment, net 125,000 150,000
Total assets $1,100,000 $830,000
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 400,000 $290,000
Short-term notes payable 200,000 60,000
Total current liabilities $ 600,000 $350,000
Long-term bonds payable, 12% 100,000 150,000
Total liabilities $ 700,000 $500,000
Stockholders' equity:
Common stock (100,000 shares) 200,000 200,000
Retained earnings 200,000 130,000
Total liabilities and stockholders' equity $1,100,000 $830,000

Kepler Company
Comparative Income Statements
This Year Last Year
Sales $ 950,000 $ 900,000
Less: Cost of goods sold (500,000) (490,000)
Gross margin $ 450,000 $ 410,000
Less: Selling and administrative expenses (275,000) (260,000)
Operating income $ 175,000 $ 150,000
Less: Interest expense (12,000) (18,000)
Income before taxes $ 163,000 $ 132,000
Less: Income taxes (65,200) (52,800)
Net income $ 97,800 $ 79,200
Less: Dividends (27,800) (19,200)
Net income, retained $ 70,000 $ 60,000

When required, round your intermediate computations and answers to two decimal places. Assume that the ending balance of last year's accounts receivable and inventory is the average for last year computations. Assume 365 days per year.

Required:

Note: Round all answers to two decimal places.

1. Compute the following ratios for each year:

This Year Last Year
a. Current ratio
b. Quick ratio
c. Receivables turnover days days
d. Inventory turnover days days

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