Question

1. Using the attached information, calculate for 2015 and 2016 the following:

a) Receivables turnover,Inventory turnover, and Payable turnover.

b)Receivables period,Inventory period,and Payable period.

c)Operating Cycle and Cash Conversion cycle

2. Discuss the changes that took place from 2015 to 2016 and suggest the ways how the company could improve its performance

Balance Sheets for Years Ended 2014, 2015, and 2016 ASSETS 2014 2015 2016 Cash and marketable securities Receivables Inventories Total current assets Grass plant and equipment less accumulated depreciation Net plant and equipment Total assets Liabilities and Equity Payables Short-term bank loan Accrued liabilities Total current liabilities Long-term debt Owners' equity Total liabilities and equity $ 10,000 60,000 70,000 140,000 205,000 -28,000 177,000 $317,000 $ 10,000 75,000 96,000 180,000 205,000 1-42,000 163.000 $343,000 $5,000 105,000 140,000 250,000 255,000 -59.000 196,000 SA46.000 47.000 40,000 8.000 95.000 100.000 122000 $317.000 57,000 44,000 9,000 110.000 90,000 143.000 $343,000 84.000 110,000 10,000 204,000 80.000 162.000 $446,000 Instructions: 1. Using the above information, calculate for 2015 and 2016 the following: a. Receivables turnover, Inventory turnover, and Payables turngyen

Answer 1

Question 1 A

1. Receivables Turnover = Net Sales / Average Receivables

Average Receivables = (Opening Receivables + Closing Receivables) / 2

For 2016

Receivables Turnover Ratio = 575,000 / 90,000

Receivables Turnover Ratio = 6.39 Times

Average Receivables = (75,000 + 105,000)/2

Average Receivables = $ 90,000

For 2015

Receivables Turnover Ratio =438,000 / 67,500

Receivables Turnover Ratio = 6.49 Times

Average Receivables = (60,000+75,000)/2

Average Receivables = $ 67,500

2. Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

Average Inventory = (Opening Balance + Closing Balance)/2

For 2016

Inventory Turnover Ratio = 380,000 / 117,500

Inventory Turnover Ratio = 3.23 Times

Average Inventory = (95,000 + 140,000) / 2

Average Inventory = $ 117,500

For 2015

Inventory Turnover Ratio = 285,000 / 82,500

Inventory Turnover Ratio = 3.45 Times

Average Inventory = (70,000 + 95,000)/2

Average Inventory = $ 82,500

3. Payable Turnover Ratio = Costs of Goods Sold / Average Payable

Average Payable = (Opening Balance + Closing Balance) / 2

For 2016

Payables Turnover Ratio = 380,000 / 70,500

Payables Turnover Ratio = 5.39 Times

Average Payable = (57,000 + 84,000)/2

Average Payable = $ 70,500

For 2015

Payables Turnover Ratio = 285,000 / 52,000

Payables Turnover Ratio = 5.48 Times

Average Payable = (47,000 + 57,000)/2

Average Payable = $ 52,000

Question 1 B

Receivables Period = 365 Days / Receivables Turnover Ratio

For 2016

Receivables Period = 365 / 6.39 Times

Receivables Period = 57.13 Days

For 2015

Receivables Period = 365 / 6.49 Times

Receivables Period = 56.25 Days

2. Inventory Period = 365 Days / Inventory Turnover Ratio

For 2016

Inventory Period = 365 / 3.23

Inventory Period = 112.86 Days

For 2015

Inventory Period = 365 / 3.45 Times

Inventory Period = 105.66 Days

3. Payables Period = 365 Days / Payables Turnover Ratio

For 2016

Payables Period = 365 / 5.39

Payables Period = 67.72 Days

For 2015

Payables Period = 365 / 5.48

Payables Period = 66.60 Days

Part 1 C

Operating Cycle = Receivables Period + Inventory Period

For 2016

Operating Cycle = 57.13 + 112.86

Operating Cycle = 169.99 Days

For 2015

Operating Cycles = 56.25 + 105.66

Operating Cycle = 161.91 Days

Cash Conversion Cycle = Receivables Period + Inventory Period - Payable Period

For 2016

Cash Conversion Cycle = 57.13 + 112.86 - 67.72

Cash Conversion Cycle = 102.27 Days

For 2015

Cash Conversion Cycle = 56.25 + 105.66 - 66.60

Cash Conversion Cycle = 95.32 Days

Question 2

The performance of Company has slightly degraded in 2016 when comparison is made to the Year 2015.

Company Receivables Turnover Ratio has declined which indicates the company has been slow in collection their debtors and the decreased Inventory turnover also indicates the low Turnover period

The Company is also slow in paying it's payables when comparison is made to Year 2015.

All of these change has alo reduced the operating cycle and cash cycle period which indicates that the company performance has declined from previous year.

To improve this situation the company should try to introduce various discounts like cash or trade discount on bulk payment purchases and rebates for timely payment of dues which will help the company to booster their Turnover priod and will also improve the sales turnover which will increase the level of sales. The timely collection of debts will also help in payment on time of payables which will help in improving the condition of company.