Question

g Use the following information for questions 4-6. The 2016 Income Statement of Illini Company reported net sales of $8 million, cost of goods sold of $4.8 million, and net income of $800,000. The following table shows the company's comparative Balance Sheets for 2016 and 2015: 2016 ($ in 000s) 2015 ($ in 000s) Assets Cash $ 300 $ 380 Accounts receivable 700 500 Inventory 900 700 Property, plant, and equipment (net) 2,400 2,120 Total assets $4,300 $3,700 Liabilities and Shareholders' Equity Current liabilities $ 960 $ 830 Bonds payable 1,200 1,200 Paid-in capital 1,000 1,000 Retained earnings 1,140 670 Total liabilities and shareholders' equity $4,300 $3,700 The industry averages for Illini’s line of business are: Inventory turnover: 5 times Average collection period: 25 days Asset turnover: 1.8 times In the following questions, assess Illini's asset management relative to its industry by calculating the key three activity ratios above.

Answer 1

Answer:

Account receivable turnover ratio = 13.3

ROE= 4.19

Explanation:

Inventory turnover = 5 times

Cost of goods sold = $4.8 million

we know that:

Inventory turnover ratio = Cost of goods sold / Average inventory

  5 =  4.5 / Average inventory

 Average inventory = 4.5 / 5 = $ 0.9 million.

Account receivable (2016)= 700,000

Account receivable (2015)=500,000

we know that:

Average account receivable = [(open) A/c receivables + (end) a/c receivable ] / 2

              =  (500,000+700,000) /2

  Average account receivable = $ 600,000  

we know that: Account receivable turnover ratio= net credit sales / average account receivable.

                           =  8000000/600000

  Account receiable turnover ratio        = 13.3.

Asset turnover ratio= 1.8 times

sales = $ 8000000

we know that total asset turnover ratio= total sales / Total asset

                     1.8 = 8000000/Total assets

             Total assets = 8000000/1.8

            Total assets      =$4,444,444

Return on equity = Net income /Average shareholder equity

Average shareholder equity =[(open) equity + (end) equity)] / 2

  Paid-up capital + retained earning (2016)=1000+1140=2140,000

  Paid-up capital + retained earning (2015)=1000+670= 1670,000

Average shareholder equity =( 2140,000+1670,000) / 2

                                               =$1905,000

Return on equity   =  8000000/1905000 = 4.19