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Homework answers / question archive / Current Attempt in Progress Work in Process Inventory is debited for all of the following except direct materials used
Current Attempt in Progress Work in Process Inventory is debited for all of the following except direct materials used. O factory labor used. O manufacturing overhead applied. manufacturing overhead incurred.
You que a business jounalist reporting on financial performance of Companies. In a recent interview with the CEO of an engineering Company, the CEO stated that the company is performing very well at present and because it is using the most modem engeneering technology while cot the same time keeping the inventory levels low. The CEO stated that the use of state-of-the-art technology coupled with low inventory levels will soon result in the company achieing I high profit levels The CEO presented the following ratio analysis to support his statements: 200 1.30 1.20 Current ratio Quick ratio 2018 1.70 0.80 2019 1.90 2.10 0.40 you agree with the CEO's statement about profits? Use the information provided in the table to explain your answer
Answer is D. Manufacturing overhead incurred.
while calculating work in process inventory, manufacturing overhead applied only will consider. difference between applied and incurred overhead will be adjusted with cost of goods sold.
Solution)
|
2017 |
2018 |
2019 |
2020 |
|
|
Current Ratio |
1.30 |
1.70 |
1.90 |
2.10 |
|
Quick ratio |
1.20 |
0.80 |
0.50 |
0.40 |
Being the business journalist of the company, I didn’t agree with the Ceo’s statement about profit. Based on the observation of the given financial ratios, both current ratio and quick ratio shows the opposite trend
As the current ratio shows the relationship of current Assets with current liabilities, the current ratio is showing the rising trend from 2017 to 2020, which means the current assets are rising as compared to current liabilities over the period of time
While on the other hand, Quick ratio shows relationship of Quick assets with current liabilities.
Quick assets = current assets – inventory – prepaid expenses
It is better indicator of liquidity and rule of thumb for quick ratio is 1:1, which means quick assets should be equal to current liabilities. The quick ratio is showing the downward trend from 2017 to 2020, which shows quick assets are not enough to pay of its current liabilities.
Looking at the trend of both the ratios, Current ratio shows there is increase in current assets over the period of time, while quick ratio shows the decline in quick assets which is not good indicator of the financial health of company. As stated by the CEO of the company that they have been adopting the low inventory level, the reason for increase in the current assets is rise in the Debtors of the company. Rising debtors of the company means company is selling products at credit to increase its turnover, which might face the risk of higher bad debts in future.
