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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

The following information was taken from Nash Inc.’s trial balances as of December 31, 2018, and December 31, 2019.

Chapter 5, Problem 76E, Ratio Analysis The following information was taken from Nash Inc.s trial balances as of December 31,

Required:

1. Calculate the net profit margin and accounts receivable turnover for 2019. ( Note: Round answers to two decimal places.)

2. How much does Nash make on each sales dollar?

3. How many days does the average receivable take to be paid (assuming all sales are on account)?

To determine

(a)

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.

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 net profit margin and accounts receivables turnover for 2019.

Explanation

The Nash Inc. has the following financial information:

Particulars Amounts ($) in 2019
Net Sales (SalesSales Return) 2,15,000
Net Income 36,000
Net Accounts Receivables 32,000

The net accounts receivable for the year 2018 is $39,000. This is given in the question.

The computation of net profit margin is as follows:

Net Profit Margin (2019)=Net IncomeNet 

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.

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.

The capability of earning of Nash on each sales dollar.

To determine

(c)

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.

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.

The number of days to be taken by average receivables to pay.

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