Question

Required: Use the information below to answer the following questions. 1) Determine the amount of accounts receivable that was written off during 2021? 2) Calculate the amount of cash collected from customers during 2021. 3) Calculate what cost of goods sold would have been for 2021 if the company had used the average cost to value its inventory. 4) Calculate the following ratios for 2021: a) Receivable turnover ratio b) Inventory turnover ratio c) Gross profit ratio Information: Below are excerpts from a company's 2021 Income Statement and their comparative Balance Sheet. Sales Cost of goods sold $6,255 5,190 2021 2020 Current assets: Accounts receivable, net $703 $583 Inventories 880 808 The Statement of Cash Flows reported Bad Debt Expense for 2021 of $8 million. The disclosure notes of the company included the following information. Accounts Receivable (in part) The allowance for uncollectible accounts was $10 and $7 at December 31, 2021 and 2020, respectively. All sales are on credit. Inventories Inventories are valued at the lower of cost or market. The cost of the majority of inventories is measured using the last-in, first-out (LIFO) method. Other inventories are measured principally at average cost and consist mostly of foreign inventories and certain raw materials. If the entire inventory had been valued on an average cost basis, inventory would have been higher by S480 and $350 at the end of 2021 and 2020. respectively During 2021, 2020 and 2019. liquidation of LIFO layers generated income of S6, S7, and $25. respectively.

Answer 1

PART – 1)

Accounts receivable written off = Opening balance of allowance for uncollectible debts + Bad debt – Closing balance of allowance for uncollectible debts

= $7 million + $8 million – $10 million

= $5 million

PART – 2)

Cash collected from customers in 2021 = Opening accounts receivable + Credit sales – Accounts receivable written off – Ending accounts receivable

= ($583 million + $7 million) + $6,255 million – $5 million – ($703 million + $10 million)

= $6,127 million

PART – 3)

COGS when firm used average cost method = COGS + Increase in opening inventory – Increase in ending inventory

= $5,190 million + $350 million – $480 million

= $5,060 million

PART – 4)

a).

Receivable turnover ratio = Sales/Average accounts receivable)

                                         = Sales/(Opening receivables + Closing receivables)/2

                                          = $6,255 million/($583 million + $703 million)/2

                                          = $6,255 million/$643 million

                                          = 9.73 times (approx.)

b)

Inventory turnover ratio = COGS/Average stock

                                        = COGS/(Opening stock + Closing stock)/2

                                        = $5,190 million/($808 million + $880 million)/2

                                        = $5,190 million/$844 million

                                        = 6.15 times (approx.)

c)

Gross profit ratio = Gross profit/Sales

                            = (Sales – COGS)/Sales

                            = ($6,255 million – $5,190 million)/$6,255 million

                            = $1,065 million/$6,255 million

                            = 0.1703 (approx.)

                            = 17.03% (approx.)