Question

E13-7 Computing and Interpreting Selected Liquidity Ratios (LO 13-4, LO 13-5] Double West Suppliers (DWS) reported sales for the year of $200,000, all on credit. The average gross profit percentage was 30 percent on sales. Account balances follow: Accounts receivable (net) Inventory Beginning $35,000 50,000 Ending $45,000 30,000 Required: 1. Compute the following turnover ratios. 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 of Part 1:

Average Receivable = (Beginning Receivable + Ending Receivable) /2
Average Receivable = ($35,000 + $45,000) / 2
Average Receivable = $40,000

Receivable Turnover Ratio = Sales / Average Receivable
Receivable Turnover Ratio = $200,000 / $40,000
Receivable Turnover Ratio = 5 times

Gross Profit = Sales * 30%
Gross Profit = $200,000 * 30%
Gross Profit = $60,000

Gross Profit = Sales – Cost of Goods Sold
$60,000 = $200,000 – Cost of Goods Sold
Cost of Goods Sold = $200,000 - $60,000
Cost of Goods Sold = $140,000

Average Inventory = (Beginning Inventory + Ending Inventory) /2
Average Inventory = ($50,000 + $30,000) /2
Average Inventory = $40,000

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory
Inventory Turnover Ratio = $140,000 / $40,000
Inventory Turnover Ratio = 3.5 times

Answer of Part 2:

Average Days to Collect = 365 days / Receivable Turnover
Average Days to Collect = 365 / 5
Average Days to Collect = 73 days

Average Days to Sell = 365 days / Inventory Turnover
Average Days to Sell = 365 / 3.5
Average Days to Sell = 104.3 days