Chapter 24, Problem 2SEB

ANALYSIS OF ACTIVITY MEASURES Based on the financial statement data in Exercise 24-1B, compute the following activity measures for 20-2 (round all calculations to two decimal places):

1. (a) Accounts receivable turnover
2. (b) Merchandise inventory turnover
3. (c) Asset turnover

To determine

Calculate accounts receivable turnover and average collection period for the period 20-2.

Explanation of Solution

Accounts receivable turnover:

Accounts receivable turnover is a liquidity measure of accounts receivable in times, which is calculated by dividing the net credit sales by the average amount of net accounts receivables. In other words, it indicates the number of times the average amount of net accounts receivables collected during a particular period.

Calculate accounts receivable turnover ratio for the period 20-2 as follows:

$\begin{array}{c}\text{Accounts receivable turnover =}\frac{\text{Net credit sales}}{\text{Average accounts receivables}}\\ =\left[\frac{\$1,850,800}{\left(\frac{\$570,600+\$639,300}{2}\right)}\right]\\ =\left[\frac{\$1,850,800}{\left(\frac{\$1,209,900}{2}\right)}\right]\\ =\left[\frac{\$1,850,800}{\$604,950}\right]\\ =3.06\text{times}\end{array}$

Therefore, accounts receivable turnover ratio for the period 20-2 is 3.06 times.

Average collection period:

Average collection period indicates the number of days taken by a business to collect its outstanding amount of accounts receivable on an average.

Calculate average collection period for the period 20-2.

$\begin{array}{c}\text{Average collection period =}\frac{365\text{days}}{\text{Accounts receivable turnover}}\\ =\frac{365}{3.06\text{times}}\\ =119.28\text{days}\end{array}$

Therefore, average collection period for the period 20-2 is 119.28 days.

To determine

Calculate merchandise inventory turnover and average number of days to sell inventory.

Explanation of Solution

Inventory turnover ratio:

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

Calculate merchandise inventory for the period 20-2.

$\begin{array}{c}\text{Inventory turnover ratio}\text{=}\frac{\text{Cost of goods sold}}{\text{Average inventory}}\\ =\left[\frac{\$1,150,400}{\left(\frac{\$639,500+\$634,900}{2}\right)}\right]\\ =\left[\frac{\$1,150,400}{\left(\frac{\$1,274,400}{2}\right)}\right]\\ =\left[\frac{\$1,150,400}{\$637,200}\right]\\ =1.81\text{times}\end{array}$

Therefore, inventory turnover ratio for the period 20-2 is 1.81 times.

Days’ sales in inventory:

Days’ sales in inventory are used to determine number of days a particular company takes to make sales of the inventory available with them.

Calculate average number of days to sell inventory for the period 20-2.

$\begin{array}{c}\text{Average number days to sell inventory =}\frac{\text{365}\text{Days}}{\text{Inventory turnover ratio}}\\ =\frac{365}{1.81\text{times}}\\ =201.66\text{days}\end{array}$

Therefore, average number of days to sell inventory during the period 20-2 is 201.66 days.

To determine

Calculate asset turnover ratio.

Explanation of Solution

Asset turnover:

Asset turnover is a ratio that measures the productive capacity of the fixed assets to generate the sales revenue for the company. Thus, it shows the relationship between the net sales and the average total fixed assets.

Calculate assets turnover ratio for the period 20-2.

$\begin{array}{c}\text{Asset turnover}\text{=}\frac{\text{Net sales }}{\text{Average total assets }}\\ =\left[\frac{\$1,850,800}{\left(\frac{\$1,898,200+\$1,929,100}{2}\right)}\right]\\ =\left[\frac{\$1,850,800}{\left(\frac{\$3,827,300}{2}\right)}\right]\\ =\left[\frac{\$1,850,800}{\$1,913,650}\right]\\ =0.97\text{to1}\end{array}$

Therefore, assets turnover ratio is 0.97 to 1.