Chapter 6, Problem 2AA

To determine

Inventory:

Inventory is an asset of the company which includes work in progress, raw material and finished goods which are in the process of making or already ready to be sold in the market. In other words inventory is goods which are unsold and would be sold.

To compute: Day’s sales uncollected as of A Company and G Company and analyze.

Explanation of Solution

Day’s sales uncollected imply how much days a company takes to collect its accounts receivables.

Formula to calculate day’s sales uncollected is

  $\begin{array}{l}\text{Day's}\text{sales}\text{uncollected=}\left(\frac{\text{Accounts}\text{Receivable}}{\text{Net}\text{Sales}}\right)\times 365\\ \end{array}$

Day’s sales uncollected for A Company

Day’s sales uncollected in current year:

Given info,

Accounts Receivable is $16,849.

Net Sales is $233,715.

Substitute $16,849 for accounts receivable, and $233,715 for net sales in the above formula,

  $\begin{array}{l}\text{Day's}\text{sales}\text{uncollected}\text{=}\left(\frac{\$16,849}{\$233,715}\right)\times 365\\ =0.0720\times 365\\ =26.31\end{array}$

Day’s sales uncollected in prior year:

Given info,

Accounts Receivable is $17,460.

Net Sales is $182,795.

Substitute $17,460 for accounts receivable, and $182,795 for net sales in the above formula,

  $\begin{array}{l}\text{Day's}\text{sales}\text{uncollected}=\left(\frac{\$17,460}{\$182,795}\right)\times 365\\ =0.095\times 365\\ =34.86\end{array}$

Hence, day’s sales uncollected are accounted for prior year is 34.86 days and for current year is 26.31 days .

(b) Day’s sales uncollected for G Company

Day’s sales uncollected in current year:

Given info,

Accounts Receivable is $11,556.

Net Sales is $74,989.

Substitute $11,556 for accounts receivable, and $74,989 for net sales in the above formula,

  $\begin{array}{l}\text{Day's}\text{sales}\text{uncollected}\text{=}\left(\frac{\$11,556}{\$74,989}\right)\times 365\\ =0.154\times 365\\ =56.24\end{array}$

Day’s sales uncollected in prior year:

Given info,

Accounts Receivable is $9,383.

Net Sales is $66,001.

Substitute $9,383 for accounts receivable, and $66,001 for net sales in the above formula,

  $\begin{array}{l}\text{Day's}\text{sales}\text{uncollected=}\left(\frac{\$9,383}{\$66,001}\right)\times 365\\ =0.142\times 365\\ =51.89\\ \end{array}$

Thus, day’s sales uncollected are accounted for 51.89 days.

Hence, day’s sales uncollected are accounted for prior year is 51.89 days and for current year is 56.24 days .

Review about trend of the companies:

• It is concluded that A Company has improved slightly in order to collect its receivables as now it would take 8.55 (34.86-26.31) less days to collect receivables.

• It is concluded that G Company has not improved in order to collect its receivables because now it would take 4.36 (56.25-51.89) more days to collect receivables.

Company with largest percentage change:

• It is ascertained that the day’s sales uncollected for A Company increased by 8.4% whereas the day’s sales uncollected for G Company decreased by 24.5%

• It is concluded that G Company has not managed its number of day’s sales uncollected as compared to previous year while A Company is much efficient than G Company.