Question

Paul & Griffon manufactures and markets many products you use every day. In 2016, sales for the company were $86,000 (all amounts in millions). The annual report did not report the amount of credit sales, so we will assume that all sales were on credit. The average gross profit percentage was 49.8 percent. Account balances for the year follow:
Beginning Ending Accounts receivable (net) $ 6,500 $ 6,900 Inventory 7,280 7,300
Required:
1. Compute the Receivables Turnover Ratio and Inventory Turnover Ratio.
2. By dividing 365 by your ratios from requirement 1, calculate the average days to collect receivables and the average days to sell inventory.

Answer 1

Answer and Explanation:

The computation is shown below:

a. The receivables Turnover Ratio and Inventory Turnover Ratio is

receivables Turnover Ratio is

= Net credit sales ÷ average account receivable

= $86,000 ÷ ($6,500 + $6,900) ÷ 2

= $86,000 ÷ $6700

= 12.84 times

Inventory turnover ratio is

= Cost of goods sold  ÷ average account receivable

= ($86,000 × (1 - 49.8%) ÷ ($7,280 +  $7,300) ÷ 2

= $43,172 ÷ $7,290

= 5.92 times

b. The average days to collect receivables and inventory is

For receivables

= 365 ÷ 12.84 times

= 28.43 days

For inventory

= 365 ÷ 5.92

= 61.66 days