Chapter 2: 32BP (page 86)

Construct the current assets section of the balance sheet from the following data. (Use cash as a plug figure after computing the other values.)
Yearly sales (credit)
$420,000
Inventory turnover
7 times
Current liabilities
$80,000
Current ratio
2
Average collection period
36 days
Current assets:
Cash
Accounts receivable
Inventory
Total current assets

Short Answer

Expert verified

Cash	$58,580
Account receivables	$41,420
Inventory	$60,000
Total current assets	$160,000

Step by step solution

Total current assets

$\begin{array}{rcl} Current assets & = & Current liabilities \times Current ratio \\ = & $ 80, 000 \times 2 \\ = & $ 160, 000 \end{array}$

Inventory

$\begin{array}{rcl} Inventory & = & \frac{Sales}{Inventory turnover ratio} \\ = & \frac{$ 420, 000}{7} \\ = & $ 60, 000 \end{array}$

Account receivables turnover ratio

$\begin{array}{rcl} Account receivable turnover ratio & = & \frac{365}{Average collection period} \\ = & \frac{365}{36} \\ = & 10.14 \end{array}$

Account receivables

$\begin{array}{rcl} Accounts receivable & = & \frac{Net credit sales}{Accounts receivable turnover ratio} \\ = & \frac{$ 420, 000}{10.14} \\ = & $ 41, 420 \end{array}$

Cash

$\begin{array}{rcl} Cash & = & Total assets - Inventory - Accounts receivable \\ = & $ 160, 000 - $ 60, 000 - $ 41, 420 \\ = & $ 58, 580 \end{array}$

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Times mirror and glass company
Sales	\)126,000
Less: Cost of goods sold	93,000
Gross profit	\(33,000
Less: selling and administrative expenses	11,000
Lease Expenses	4,000
Operating profit*	\)18,000
Less: Interest expenses	3,000
Earning before taxes	\(15,000
Less: Taxes (30%)	4,500
Earning after taxes	\)10,500

	20X1	20X2
Sales	\(3,230,000	\)3,370,000
Cost of goods sold	2,130,000	2,850,000
Gross profits	\(1,100,000	\)520,000
Selling and administrative expenses	298,000	227,000
Operating profits	\(802,000	\)293,000
Interest expense	47,200	51,600
Income before taxes	\(754,800	\)241,400
Taxes (35%)	264,180	84,490
Income after tax	\(490,620	\)156,910

Short Answer

Step by step solution

Total current assets

Inventory

Account receivables turnover ratio

Account receivables

Cash

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Yearly sales (credit)	\(420,000
Inventory turnover	7 times
Current liabilities	\)80,000
Current ratio	2
Average collection period	36 days
Current assets:
Cash
Accounts receivable
Inventory
Total current assets