To calculate the current ratio, acid test ratio, and cash conversion cycle (CCC) for Polar Enterprises for the years ending 20.10 and 20.9, we will follow the definitions and formulas for these financial metrics.
1.1 Current Ratio and Acid Test Ratio
Current Ratio: The current ratio is calculated by dividing current assets by current liabilities.
\[ \text{Current Ratio} = \frac{\text{Current Assets}}{\text{Current Liabilities}} \]
Acid Test Ratio: The acid test ratio (or quick ratio) is calculated by taking current assets minus inventories, then dividing by current liabilities.
\[ \text{Acid Test Ratio} = \frac{\text{Current Assets} - \text{Inventories}}{\text{Current Liabilities}} \]
Calculations:
-
Year 20.10:
- Current Assets: 2,866,530
- Current Liabilities: 1,088,860
- Inventories: 1,482,200
Current Ratio for 20.10: \[ \text{Current Ratio} = \frac{2,866,530}{1,088,860} \approx 2.64 \]
Acid Test Ratio for 20.10: \[ \text{Acid Test Ratio} = \frac{2,866,530 - 1,482,200}{1,088,860} \approx \frac{1,384,330}{1,088,860} \approx 1.27 \]
-
Year 20.9:
- Current Assets: 4,974,530
- Current Liabilities: 588,310
- Inventories: 2,038,860
Current Ratio for 20.9: \[ \text{Current Ratio} = \frac{4,974,530}{588,310} \approx 8.45 \]
Acid Test Ratio for 20.9: \[ \text{Acid Test Ratio} = \frac{4,974,530 - 2,038,860}{588,310} \approx \frac{2,935,670}{588,310} \approx 4.98 \]
Summary of Ratios:
- Current Ratio for 20.10: 2.64
- Acid Test Ratio for 20.10: 1.27
- Current Ratio for 20.9: 8.45
- Acid Test Ratio for 20.9: 4.98
1.2 Cash Conversion Cycle (CCC)
The cash conversion cycle is calculated using the following formula:
\[ \text{CCC} = \text{Days Inventory Outstanding (DIO)} + \text{Days Sales Outstanding (DSO)} - \text{Days Payable Outstanding (DPO)} \]
To compute this, we need to find:
-
Days Inventory Outstanding (DIO): \[ \text{DIO} = \left( \frac{\text{Average Inventory}}{\text{Cost of Sales}} \right) \times 365 \]
-
Days Sales Outstanding (DSO): \[ \text{DSO} = \left( \frac{\text{Average Accounts Receivable}}{\text{Sales}} \right) \times 365 \]
-
Days Payable Outstanding (DPO): \[ \text{DPO} = \left( \frac{\text{Average Accounts Payable}}{\text{Cost of Sales}} \right) \times 365 \]
Step 1: Calculate Average Values
-
Inventories:
- Average Inventory = (1,482,200 + 2,038,860) / 2 = 1,760,530
-
Accounts Receivable:
- Average Accounts Receivable = (261,290 + 155,200) / 2 = 208,245
-
Accounts Payable:
- Average Accounts Payable = (190,660 + 192,040) / 2 = 191,350
Step 2: Calculate DIO, DSO, DPO
-
Cost of Sales for each year:
- Cost of Sales 20.10 = 26,180,100
- Cost of Sales 20.9 = 15,993,700
-
Sales for each year:
- Sales 20.10 = 32,011,500
- Sales 20.9 = 19,373,000
Calculations for 20.10:
-
Days Inventory Outstanding (DIO) for 20.10: \[ \text{DIO} = \left( \frac{1,760,530}{26,180,100} \right) \times 365 \approx 24.6 \text{ days} \]
-
Days Sales Outstanding (DSO) for 20.10: \[ \text{DSO} = \left( \frac{208,245}{32,011,500} \right) \times 365 \approx 2.36 \text{ days} \]
-
Days Payable Outstanding (DPO) for 20.10: \[ \text{DPO} = \left( \frac{191,350}{26,180,100} \right) \times 365 \approx 2.66 \text{ days} \]
CCC for 20.10: \[ \text{CCC} = 24.6 + 2.36 - 2.66 \approx 24.3 \text{ days} \]
Calculations for 20.9:
-
Days Inventory Outstanding (DIO) for 20.9: \[ \text{DIO} = \left( \frac{2,038,860}{15,993,700} \right) \times 365 \approx 46.7 \text{ days} \]
-
Days Sales Outstanding (DSO) for 20.9: \[ \text{DSO} = \left( \frac{155,200}{19,373,000} \right) \times 365 \approx 2.93 \text{ days} \]
-
Days Payable Outstanding (DPO) for 20.9: \[ \text{DPO} = \left( \frac{192,040}{15,993,700} \right) \times 365 \approx 4.41 \text{ days} \]
CCC for 20.9: \[ \text{CCC} = 46.7 + 2.93 - 4.41 \approx 45.22 \text{ days} \]
Summary of Cash Conversion Cycle:
- CCC for 20.10: 24.3 days
- CCC for 20.9: 45.22 days
Overall Summary:
- Current Ratio: 20.10: 2.64; 20.9: 8.45
- Acid Test Ratio: 20.10: 1.27; 20.9: 4.98
- Cash Conversion Cycle: 20.10: 24.3 days; 20.9: 45.22 days