Chapter 13, Problem 8E

To determine

(1)

Introduction:

Days sales uncollected ratio helps the creditors and investors to calculates the time in which company collects its account receivable.

To calculate:

Days’ sales uncollected.

Answer to Problem 8E

Days sales uncollected for 2015 = 49 days

Days sales uncollected for 2014 = 43 days

Explanation of Solution

$Dayssalesuncollected=\frac{AccountsReceivable}{NetSales}\times 365$

Days sales uncollected for 2015 $=\frac{\$89,500}{\$673,500}\times 365$

= 49 days

Days sales uncollected for 2014 $=\frac{\$62,500}{\$532,000}\times 365$

= 43 days

Days sales uncollected are increasing from previous year which means that the time for collecting the accounts receivable is increasing.

To determine

(2)

Introduction:

Accounts receivable turnover ratio calculates the number of times company converts its average account receivables in cash a particular year.

To calculate:

Accounts receivable turnover.

Answer to Problem 8E

Accounts receivable turnover ratio for 2014 = 9.44 times

Accounts receivable turnover ratio for 2015 = 8.86 times

Explanation of Solution

$Average\text{ account receivable }=\frac{Beginningbalance+Endingbalance}{2}$

Average account receivable for 2014 $=\frac{\$50,200+\$62,500}{2}$

= $56, 350

Average account receivable for 2015 $=\frac{\$62,500+\$89,500}{2}$

= $76, 000

$Accountsreceivableturnoverratio=\frac{Creditsales}{Averageaccountreceivable}$

Accounts receivable turnover ratio for 2014 $=\frac{\$532,000}{\$56,350}$

= 9.44 times

Accounts receivable turnover ratio for 2015 $=\frac{\$673,500}{\$76,000}$

= 8.86 times A decrease in the accounts receivable ratio is not a good sign that means the company is dealing with neglecting clients. The company needs to work on improving its accounts receivable ratio.

To determine

(3)

Introduction:

Inventory turnover ratio measures how many times inventory is sold during a period.

To calculate:

Inventory turnover ratio.

Answer to Problem 8E

Inventory turnover ratio for 2014 = 5.06 times

Inventory turnover ratio for 2015 = 4.21 times

Explanation of Solution

$Inventoryturnover=\frac{CostofGoodsSold}{AverageInventory}$

$Averageinventory=\frac{Beginningbalance+Endingbalance}{2}$

	2014	2015
COGS	$345, 500	$411, 225
Average inventory	$68, 250	$97, 500
Inventory turnover ratio	5.06 times	4.21 times

A decrease in inventory turnover ratio means that the company is holding its inventory for a longer period which might have an adverse effect on company’s performance.

To determine

(4)

Introduction:

Days sales in inventory calculates the time period which company takes to convert inventory into sales.

To calculate:

Days sales in inventory.

Answer to Problem 8E

Days sales in inventory in 2014 = 72 days

Days sales in inventory in 2015 = 87 days

Explanation of Solution

$Dayssalesininventory=\frac{Averageinventory}{C.O.G.S}\times 365$

	2014	2015
Days sales in inventory	72 days	87 days

The days sales in inventory is increasing from 2014 to 2015 which indicates that the company is holding its inventory for too long. This can be due to purchase of too much inventory or poor performance sales performance.