The comparative balance sheets for Pharoah Company as of December 31 are presented below. Pharoah Company Comparative Balance Sheets December 31
Assets 2022 2021
Cash $55,760 $36,900
Accounts receivable 41,000 47,560
Inventory 124,189 116,440
Prepaid expenses 12,530 17,220
Land 118,900 106,600
Buildings 164,000 164,000
Accumulated depreciation—buildings (49,200 ) (32,800 )
Equipment 184,500 127,100
Accumulated depreciation—equipment (36,900 ) (28,700 )
Total $614,779 $554,320
Liabilities and Stockholders’
Equity Accounts payable $36,679 $29,520
Bonds payable 246,000 246,000
Common stock, $1 par 164,000 131,200
Retained earnings 168,100 147,600
Total $614,779 $554,320

Additional information for 2022:
Net income was $29,500.
Sales on account were $392,000. Sales returns and allowances amounted to $29,300.
Cost of goods sold was $201,900.
Net cash provided by operating activities was $56,200.
Capital expenditures were $30,000, and cash dividends were $15,100.

Required:
Compute the following ratios at December 31, 2022.

a. Current ratio.
b. Accounts receivable turnover.
c. Average collection period.
d. Inventory turnover.
e. Days in inventory.
f. Free cash flow.

a. Current ratio for 2022 = 6.37

b. Accounts receivable turnover for 2022 = 8.19 times

c. Average collection period = 365 / 8.19 = 44.57 days

d. Inventory turnover for 2022 = 1.68 times

e. Days in inventory = 224.51 days

f. Free cash flow = $26,200

Explanation:

a. Current ratio for 2022.

Current ratio = Current assets / Current liabilities (1)

Where:

Current assets for 2022 = Cash for 2022 + Accounts receivable for 2022 + Inventory for 2022 + Prepaid expenses for 2022 = $55,760 + $41,000 + $124,189 + $12,530 = $233,479

Current liabilities for 2022 = Accounts payable for 2022 = $36,679

Substituting the values into equation (1), we have:

Current ratio for 2022 = $233,479 / $36,679 = 6.37

b. Accounts receivable turnover.

Accounts receivable turnover = Net sales / Average accounts receivable (2)

Where:

Net sale for 2022 = Sales on account for 2022 - Sales returns and allowances for 2022 = $392,000 - $29,300 = $362,700

Average accounts receivable = (Accounts receivable for 2022 + Accounts receivable for 2021) / 2 = ($41,000 + $47,560) / 2 = $44,280

Substituting the values into equation (2), we have:

Accounts receivable turnover for 2022 = $362,700 / $44,280 = 8.19 times

c. Average collection period.

Average collection period = 365 days / Accounts receivable turnover (3)

Where;

Accounts receivable turnover = 8.19

Substituting the values into equation (3), we have:

Average collection period = 365 / 8.19 = 44.57 days

d. Inventory turnover.

Inventory turnover = Cost of goods sold / Average inventory (4)

Where;

Cost of goods sold = $201,900

Average inventory = (Inventory for 2022 + Inventory 2021) / 2 = ($124,189 + $116,440) / 2 = $120,314.50

Substituting the values into equation (4), we have:

Inventory turnover for 2022 = $201,900 / $120,314.50 = 1.68 times

e. Days in inventory.

Days in inventory = (Ending inventory / Cost of goods sold) * 365 (5)

Where;

Ending inventory for 2022 = Inventory for 2022 = $124,189

Cost of goods sold for 2022 = $201,900

Substituting the values into equation (5), we have:

Days in inventory = ($124,189 / $201,900) * 365 = 224.51 days

f. Free cash flow.

Free cash flow = Net cash provided by operating activities - Capital expenditure (6)

Where;

Net cash provided by operating activities = $56,200

Capital expenditures = $30,000

Free cash flow = $56,200 - $30,000 = $26,200

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