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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881

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Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem
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Ratio Analysis

Watts Inc. specializes in imported goods, focusing particularly on food products. For 2019, the company realized net sales of $9,700,000 and average net trade accounts receivable were $1,057,000. In 2018, Watts had realized a net loss for the year in the amount of $20,000; however, extraordinary efficiency efforts in 2019 increased net income by $445,000.

Required:

1. Calculate Watts' accounts receivable turnover.

2. Calculate Watts' net profit margin ratio.

To determine

(a)

Accounts Receivable Turnover Ratio:

The accounts receivable turnover ratio is a ratio which helps in measuring the process of collection of receivables of a business as faster the process, better the liquidity of the business. This ratio shows the policy of the company and its effectiveness against the credit sales of the company.

To calculate:

The accounts receivable turnover ratio.

Explanation

The net sales of $97,00,000 and average net accounts receivable is $10,57,000. This is given in the question.

The computation of accounts receivable turnover ratio is as follows:

Accounts Receivable Turnover Ratio=

To determine

(b)

Net Profit Margin Ratio:

The net margin ratio is a type of profitability ratio which is used to measure the returns and earning after all expenses i.e. net earnings and compute the ratio in respect to the sales of the business.

To calculate:

The net profit margin ratio.

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