Question

Double West Suppliers (DWS) reported sales for the year of $300,000, all on credit. The average gross profit percentage was 40 percent on sales. Account balances follow: Beginning Ending Accounts receivable (net) $ 45,000 $ 55,000 Inventory 60,000 40,000 Required: Compute the following turnover ratios. 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

To calculate the turnover ratios, divide the net credit sales by the average accounts receivable for the accounts receivable turnover ratio, and divide the cost of goods sold by the average inventory for the inventory turnover ratio.

Step-by-step explanation:

To calculate the turnover ratios for accounts receivable and inventory, we first need to calculate the average accounts receivable and average inventory. The average accounts receivable can be calculated by adding the beginning and ending accounts receivable and dividing by 2: ($45,000 + $55,000) / 2 = $50,000. The average inventory can be calculated in the same way: ($60,000 + $40,000) / 2 = $50,000.

To calculate the accounts receivable turnover ratio, we divide the net credit sales (sales made on credit) by the average accounts receivable: $300,000 / $50,000 = 6.

To calculate the inventory turnover ratio, we divide the cost of goods sold (given as 60% of sales) by the average inventory: ($300,000 * 60%) / $50,000 = 3.6.

To calculate the average days to collect receivables, we divide 365 by the accounts receivable turnover ratio: 365 / 6 = 60.8 days. To calculate the average days to sell inventory, we divide 365 by the inventory turnover ratio: 365 / 3.6 = 101.4 days.

Answer 2

(1) Account receivable turnover Ratio = 6 times

Inventory turnover Ratio = 3.6 times

(2) Average days to collect receivables = 61 days

Average days to collect inventory = 101 days

Step-by-step explanation:

(1). Net credit sales = $300,000

Average account receivable = ($45,000 + $55,000) ÷ 2 = $50,000

COG sold = $300,000 - (40% × $300,000) = $180,000

Average inventory = (60,000 + 40,000) ÷ 2 = 50,000

Account receivable turnover Ratio= Net Credit Sales ÷ Average Accounts receivable

= $300,000 ÷ 50,000

= 6 times

Inventory turnover Ratio= COG Sold ÷ Average Inventory

= 180,000 ÷ 50,000

= 3.6 times

(2). Average days to collect receivables= 365 ÷ 6

= 60.83 or 61 days

Average days to collect inventory= 365 ÷ 3.6

= 101.38 or 101 days