Q7SE - Horngren'S Financial And Managerial Accounting

Question

Computing inventory, gross profit, and receivables ratios

Requirements

1. Compute the inventory turnover, days’ sales in inventory, and gross profit

percentage for Accel’s Companies for 2018.

2. Compute days’ sales in receivables during 2018. Round intermediate calculations to

three decimal places. Assume all sales were on account.

3. What do these ratios say about Accel’s Companies’ ability to sell inventory and

collect receivables?

Step-by-Step Solution

Answer

Answer

Accel's Companies' have a high amount of inventory on hand and a low inventory turnover. 

Step 1: Calculations

Requirement 1

Average Merchandise Inventory = ($6,900 + $8,600)/2

Average Merchandise Inventory = $15,500/2

Average Merchandise Inventory = $7,750

Inventory Turnover Cost of Goods Sold/ Average Merchandise Inventory

Inventory Turnover = $28,400 / $7,750

Inventory Turnover = 3.66 times

Days' Sales in Inventory = 365 / Inventory Turnover

Days' Sales in Inventory = 365 / 3.66

Days' Sales in Inventory = 100 days

Gross Profit= Net Sales Revenue - Cost of Goods Sold

Gross Profit= $40,600-$28,400

Gross Profit= $12,200

Gross Profit Percentage= Gross profit/ Net Sales Revenue 

Gross Profit Percentage = $12,200 / $40,600

Gross Profit Percentage = 30.0%

Step 2: Calculations

Requirement 2

Average Accounts Receivable = ($7,500 +$5,200)/2

Average Accounts Receivable = $12,700/2

Average Accounts Receivable = $6,350

Accounts Receivable Turnover Ratio= Net Sales Revenue / Average Accounts Receivable

Accounts Receivable Turnover Ratio =$40,600 / $6,350 

Accounts Receivable Turnover Ratio = 6.394 times

Days' Sales in Average Receivables = 365/ Accounts Receivable Turnover Ratio 

Days' Sales in Average Receivables = 365/ 6.394 

Days' Sales in Average Receivables = 57 days

Step 3: Explanations

Requirement 3

Accel's Companies' have a high amount of inventory on hand and a low inventory turnover. This could be an area to look at and compare to the prior year and industry average. They have a low gross profit percentage, which is a bad indicator. The amount of time it takes to collect receivables seems high, but this would depend on the credit terms.