Question

Selected financial data for Quick Sell, Inc., a retail store, appear as follows.

Year 2 Year 1
Sales (all on account) $ 750,000 $ 610,000
Cost of goods sold 495,000 408,000
Average inventory during the year 110,000 102,000
Average receivables during the year 150,000 100,000
a-1. Compute the gross profit percentage for both years. (Round your percentage answers to the nearest whole number. i.e. 0.1234 as 12%.)
a-2. Compute the inventory turnover for both years. (Round your answers to 1 decimal place.)
a-3. Compute the accounts receivable turnover for both years. (Round your answers to 1 decimal place.)
b. Which of the following show a positive or negative trend?
Year 1 Year 2
Gross profit percentage % %
Inventory turnover times times
Accounts receivable turnover times times
Trend
Gross profit rate
Inventory turnover
Accounts receivable turnover
Growth in net sales

Answer 1

The gross profit percentages for Year 2 and Year 1 are 34% and 33% respectively. The inventory turnovers for Year 2 and Year 1 are 4.5 times and 4 times respectively. The accounts receivable turnovers for Year 2 and Year 1 are 5 times and 6.1 times respectively. The gross profit rate shows a positive trend, the inventory turnover shows a positive trend, and the accounts receivable turnover shows a negative trend.

Step-by-step explanation:

a-1. To compute the gross profit percentage, divide the gross profit by the sales and multiply by 100. For Year 2: (Sales - Cost of goods sold) / Sales * 100 = ($750,000 - $495,000) / $750,000 * 100 = 34%. For Year 1: (Sales - Cost of goods sold) / Sales * 100 = ($610,000 - $408,000) / $610,000 * 100 = 33%.

a-2. To compute the inventory turnover, divide the cost of goods sold by the average inventory. For Year 2: Cost of goods sold / Average inventory = $495,000 / $110,000 = 4.5 times. For Year 1: Cost of goods sold / Average inventory = $408,000 / $102,000 = 4 times.

a-3. To compute the accounts receivable turnover, divide the net credit sales by the average accounts receivable. For Year 2: Net credit sales / Average accounts receivable = $750,000 / $150,000 = 5 times. For Year 1: Net credit sales / Average accounts receivable = $610,000 / $100,000 = 6.1 times.

b. The trend analysis of the data shows the following:

• Gross profit rate: The gross profit percentage decreased slightly from 33% in Year 1 to 34% in Year 2.
• Inventory turnover: The inventory turnover increased from 4 times in Year 1 to 4.5 times in Year 2.
• Accounts receivable turnover: The accounts receivable turnover decreased from 6.1 times in Year 1 to 5 times in Year 2.

Growth in net sales is not provided in the given data, so it cannot be determined if it shows a positive or negative trend.

Answer 2

a-1

Year 2 34%

Year 1 33%

a-2

Year 2 4.5

Year 1 4.0

a-3

Year 2 5.0

Year 1 6.1

b. Year 2

Step-by-step explanation:

a-1. Computation for the gross profit percentage for both years using this formula

Gross profit percentage = Gross profit / Sales

Let plug in the formula

Year 2 =( $ 750,000-495,000)/$ 750,000 = 34%

Year 1 = ($ 610,000-$408,000)/$ 610,000 = 33%

a-2. Computation for the inventory turnover for both years using this formula

Inventory turnover = Cost of goods sold / Average inventory during the year

Let plug in the formula

Year 2 = 495,000 /110,000 = 4.5

Year 1 = 408,000/102,000= 4.0

a-3. Computation for the accounts receivable turnover for both years using this formula

Accounts receivable turnover = Sales (on account) / Average receivables during the year

Let plug in the formula

Year 2 = $ 750,000 /150,000 = 5.0

Year 1 = $ 610,000 /100,000 = 6.1

b. Based on the above calculation Year 2 show a positive trend.