Question

Procter & Gamble is a multinational corporation that manufactures and markets many household products. Last year, sales for the company were $83,062 (all amounts in millions). The annual report did not disclose the amount of credit sales, so we will assume that 90 percent of sales were on credit. The average gross profit on sales was 49 percent. Additional account balances were: Ending $6,386 Beginning $6,508 6,909 Accounts receivable (net) Inventory 6,759 Required: 1. Compute Procter & Gamble's receivable turnover ratio and its inventory turnover ratio. (Round Intermediate calculations to the nearest whole dollar. Round your answers to 2 decimal places.) Turnover Accounts receivable Inventory 2. How many days does it take for the company to collect its accounts recelvable and sell its inventory? |(Use 365 days In a year. Round your answers to 2 decimal places.) Days To collect accounts receivable To sell inventory Assume current assets totaled $49,000 and the current ratio was 1.2 before the following independent transactions: (1) Purchased merchandise for $13,000 on short-term credit (2) Purchased a delivery truck for $31,000. Pald $6,000 cash and signed a two-year interest-bearing note for the balance. Required: Compute the current ratio after each independent transaction. (Round your answers to 2 decimal places.) Transaction Current Ratio (1) (2)

Answer 1

Answer to Question 1:

Question 1 Inventory Turnover Cost of goods sold/Average Inventory Average Inventory (Opening Inventory Closing Inventory)/2 Cost of goods sold Sales * (1 - Profit Margin) = Amounts in millions Cost of goods sold Calculation 42,362 (83,062*51%) Opening Inventory Closing Inventory Average Inventory 6,909 6,759 $ 6,834 (6,909 6,759)/2 Calculation Inventory Turnover 6.20 |(42,362/6,834) Calculation Accounts Receivables Turnover Credit sales/Average Accounts Receivable Average Accounts Receivable = (Opening Accounts Receivable Closing Accounts Receivable)/2 Net Credit Sales Calculation + 74,756 (83,062*90%) Opening Accounts Receivable 6,508 Closing Accounts Receivable Average Accounts Receivable 6,386 6,447 (6,508 6,386)/2 Calculation Accounts Receivables Turnover 11.60 Calculation (74,756/6,447)

Answer to Question 2:

Question 2 Calculation of number of days to collect an accounts receivable Accounts receivable period 365/Receivables turnover Accounts receivable period 365/6.20 Accounts receivable period 58.87 days Calculation of number of days to sell inventory Inventory period 365/Inventory Turnover Inventory period 365/11.60 Inventory period 31.47 days Calculation of Current Ratio Current Ratio = Current Assets/Current Liabilities After Transaction 1, Current Assets would increase by $ 13,000 and Current liabilities also increase by $ 13,000 Calculation of Current liabilities: 1.2 Current Assets/Current Liabilities 1.2 49,000/Current Liabilities Current liabilities 49,000/1.2 Current liabilities 40,833 Current Assets 62,000 (49,000 13,000) Calculation + Current Liabilities $ 53,833 (40,833 13,000) Calculation + Current Ratio 1.15 (62,000/53,833) Calculation

Answer:

After Transaction 2, Current Assets would decrease by $ 6,000 and Current liabilities also increase by $ 25,000 Calculation of 25,000 31,000 6,000 Current Assets 43,000 Calculation (49,000 6,000) Current Liabilities 65,833 Calculation (40,833 25,000) 0.65 Current Ratio Calculation (43,000/65,833) Transaction Current Ratio 1 1.15 2 0.65