Chapter 14, Problem 3E

To determine

Accounts Receivable Turnover:

It is an activity ratio which determines a company’s efficiency in collecting their receivables on yearly basis. It is computed by dividing the credit sales and the average accounts receivable during given period of time.

Average Collection Period:

The period during which a company is able to collect from its accounts receivables is called an average collection period. It is computed by dividing the accounts receivable turnover ratio by the number of days during the year.

Inventory Turnover:

It is an efficiency ratio which measures how effective a company has been in selling its inventory during particular time.

Average Sale Period:

It is a ratio which measures the period of time taken by a company to sell its inventory. It is computed by dividing the number of days in a year with average inventory during a given period.

Operating Cycle:

It is an average period within which a company is able to turn its cash incurred on the production of goods into cash collected from the customer as sales revenue.

Total Asset Turnover:

The ratio which indicates a company’s efficiency in generating sales from its assets. It is calculated by dividing the net sales with the average total assets of the company.

: Compute the following financial data for this year:

1. Accounts Receivable Turnover

2. Average Collection Period.

3. Inventory Turnover

4. Average Sale Period

5. Operating Cycle

6. Total Asset Turnover

Explanation of Solution

1. Computation of Accounts Receivable turnover

  $\begin{array}{l}AccountsReceivableTurnover=\frac{CreditSales}{AverageAccountsReceivable}\hfill \\ =\frac{\$79,000,000}{\$10,700,000}\hfill \\ =7.38times\hfill \\ \hfill \\ *AverageAccountsReceivable=\frac{BeginningAccountsReceivable+EndingAccountsReceivable}{2}\hfill \\ =\frac{\$9,100,000+\$12,300,000}{2}\hfill \\ =\$10,700,000\hfill \end{array}$

2. Computation of Average Collection Period

  $\begin{array}{l}AverageCollectionPeriod=\frac{365}{AccountsReceivableTurnover}\hfill \\ =\frac{365}{7.38times}\hfill \\ =49.46Days\hfill \end{array}$

3. Computation of Inventory Turnover

  $\begin{array}{l}InventoryTurnover=\frac{CostofGoodsSold}{AverageInventory}\hfill \\ =\frac{\$52,000,000}{\$8,950,000}\hfill \\ =5.81times\hfill \\ \hfill \\ *AverageInventory=\frac{BeginningInventory+EndingInventory}{2}\hfill \\ =\frac{\$8,200,000+\$9,700,000}{2}\hfill \\ =\$8,950,000\hfill \end{array}$

4. Computation of Average Sale Period

  $\begin{array}{l}AverageSaleperiod=\frac{365}{InventoryTurnover}\hfill \\ =\frac{365}{5.81times}\hfill \\ =62.82days\hfill \end{array}$

5. Computation of Operating Cycle

  $\begin{array}{l}OperatingCycle=AverageSalesPeriod+AverageCollectionPeriod\hfill \\ =62.82days+49.46days\hfill \\ =112.28days\hfill \end{array}$

6. Computation of Total Assets Turnover Ratio

  $\begin{array}{l}TotalAssetsTurnoverRatio=\frac{NetSales}{AverageTotalAssets}\hfill \\ =\frac{\$79,000,000}{\$48,120,000}\hfill \\ =1.64times\hfill \\ \hfill \\ *AverageTotalAssets=\frac{BeginningTotalAssets+EndingTotalAssets}{2}\hfill \\ =\frac{\$45,960,000+\$50,280,000}{2}\hfill \\ =\$48,120,000\hfill \end{array}$