Chapter 17, Problem 8E

(1)

To determine

Compute days’ sales uncollected and comment on the changes in the ratios from December 31, 2014 to December 31, 2015.

Explanation of Solution

Days’ sales uncollected: This ratio is used to determine the number of days a particular company takes to collect accounts receivables.

      $\text{Days’ sales uncollected}\text{=}\frac{\text{Ending accounts receivable}}{\text{ Sales}}\times 365\text{days}$

For December 31, 2014:

$\begin{array}{c}\text{Days’ sales uncollected}\text{=}\frac{\$62,500}{\$532,000}\times 365\text{days}\\ =42.9\text{days}\end{array}$

For December 31, 2015:

$\begin{array}{c}\text{Days’ sales uncollected}\text{=}\frac{\$89,500}{\$673,500}\times 365\text{days}\\ =48.5\text{days}\end{array}$

Analysis and comment on changes:

The days’ sales turnover has increased rapidly from 42.9 days (December 31, 2014) to 48.5 days (December 31, 2015) and hence the ratio has worsened.

(2)

To determine

Compute accounts receivable turnover and comment on the changes in the ratios from December 31, 2014 to December 31, 2015.

Explanation of Solution

Accounts receivable turnover: Receivables turnover ratio is mainly used to evaluate the collection process efficiency. It helps the company to know the number of times the accounts receivable is collected in a particular time period. This ratio is determined by dividing credit sales and average accounts receivable.

$\text{Receivables Turnover Ratio}\text{=}\frac{\text{Net Sales}}{\text{Average}\text{Accounts}\text{Receivables}}$

For December 31, 2014:

$\begin{array}{c}\text{Receivables Turnover Ratio}\text{=}\frac{\$532,000}{\left(\$62,500+\$50,200\right)÷2}\\ =9.4\text{times}\end{array}$

For December 31, 2015:

$\begin{array}{c}\text{Receivables Turnover Ratio}\text{=}\frac{\$673,500}{\left(\$89,500+\$62,500\right)÷2}\\ =8.9\text{times}\end{array}$

Analysis and comment on changes:

The receivables turnover ratio declined from 9.4 times (December 31, 2014) to 8.9 times (December 31, 2015) and hence the ratio has worsened.

(3)

To determine

Compute inventory turnover, and comment on the changes in the ratios from December 31, 2014 to December 31, 2015.

Explanation of Solution

Inventory turnover: Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period.

$\text{Inventory Turnover Ratio =}\frac{\text{Cost of Goods Sold }}{\text{Average Inventory}}$

For December 31, 2014:

$\begin{array}{c}\text{Inventory Turnover Ratio =}\frac{\text{Cost of Goods Sold }}{\text{Average Inventory}}\\ =\frac{\$345,500}{\left(\$82,500+\$54,000\right)÷2}\\ =5.1\text{times}\end{array}$

For December 31, 2015

$\begin{array}{c}\text{Inventory Turnover Ratio =}\frac{\text{Cost of Goods Sold }}{\text{Average Inventory}}\\ =\frac{\$411,225}{\left(\$112,500+\$82,500\right)÷2}\\ =4.2\text{times}\end{array}$

Analysis and comment on changes:

The inventory turnover ratio declined from 5.1 times (December 31, 2014) to 4.2 times (December 31, 2015) and hence the ratio has worsened.

(4)

To determine

Compute days’ sales in inventory and comment on the changes in the ratios from December 31, 2014 to December 31, 2015.

Explanation of Solution

Days’ sales in inventory: Days’ in inventory is determined as the number of days a particular company takes to make sales of the inventory available with them.

$\text{Days’ in inventory}\text{=}\frac{\text{Ending}\text{Inventory}}{\text{Cost of goods sold}}\times 365\text{days}$

For December 31, 2014:

$\begin{array}{c}\text{Days’ in inventory}\text{=}\frac{\text{Ending}\text{Inventory}}{\text{Cost of goods sold}}\times 365\text{days}\\ \text{= }\frac{\$82,500}{\$345,500}\times \text{365}\text{days}\\ \text{=}\text{87}\text{.2 days}\end{array}$

For December 31, 2015:

$\begin{array}{c}\text{Days’ in inventory}\text{=}\frac{\text{Ending}\text{Inventory}}{\text{Cost of goods sold}}\times 365\text{ days}\\ \text{= }\frac{\$112,500}{\$411,225}\times \text{365 days}\\ \text{=}99.\text{85 days}\end{array}$

Analysis and comment on changes:

The day’s in inventory has increased rapidly from 87.2 days (December 31, 2014) to 99.85 times (December 31, 2015) and hence the ratio has worsened.