Chapter 15: Q9RQ (page 835)

Briefly describe the ratios that can be used to evaluate a company’s ability to sell merchandise inventory and collect receivables.

Short Answer

Expert verified

Inventory turnover ratio,

Gross Profit ratio,

Accounts Receivable ratio etc.

Step by step solution

Meaning of Ratio

The ratio indicates the association between the two numbers or quantities and shows how one element of the ratio relates to the other.

Explanation of some ratios use by the companies

Theinventory turnover ratio indicates the average inventory sold by how many times a period.

Formula:

$Inventory turnover ratio = \frac{Cost of goods sold}{Average merchandise inventory}$

2.Days' sales in inventorytell the average number of day’s inventory is held before converting it into sales by the company or organization.

Formula:

$Days' sales in inventory = \frac{365}{Inventory turnover}$

3. Gross profit percentagemeasures the percentage of gross profit earned by the company on its net sales.

Formula:

$Gross profit percentage = \frac{Gross profit}{Net sales}$

4. Accounts receivable turnovershows how many times receivables are collected by the company over the year.

Formula:

$Average receivables turnover ratio = \frac{Net credit sales}{Average net accounts receivable}$

5. The total days of collection of receivables show the days to collect receivables, also known as Day's Accounts Receivable collection Ratio.

Formula:

$Days' accounts receivable collection ratio = \frac{365}{Accounts receivable turnover}$

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1..Includes the income statement, balance sheet, statement of stockholders’ equity, and statement of cash flows	a. Notes to financial statements
2. Attests to the fairness of the presentation of the financial statements.	b. Report of independent registered public accounting firm
3. Includes a summary of significant accounting policies and explanations of specific items on the financial statements.	c. Management’s discussion and analysis of financial condition and results of operations (MD&A)
4. Is written by the company to help investors understand the results of operations and the financial condition of the company.	d. Financial statements

SANFIELD, INC. Comparative Income Statement Years Ended December 31, 2018, and 2017
	2018	2017
Net Sales Revenue	\( 462,000	\) 430,000
Cost of Goods Sold	236,000	213,000
Gross Profit	226,000	217,000
Operating Expense	135,000	133,000
Income from Operations	91,000	84,000
Interest Expense	8,000	12,000
Income Before Income Tax	83,000	72,000
Income Tax Expense	18,000	22,000
Net Income	\( 65,000	\) 50,000

SANFIELD, INC. Comparative Balance Sheet December 31, 2018, and 2017
	2018	2017	2016
Asset
Current Assets:
Cash	\( 99,000	\) 97,000
Accounts Receivable, Net	109,000	117,000	\( 100,000
Merchandise Inventory	142,000	164,000	207,000
Prepaid Expenses	15,000	5,000
Total Current Assets	365,000	383,000
Property, Plant, and Equipment, Net	215,000	177,000
Total Assets	\) 580,000	\( 560,000	\) 599,000

Liabilities
Total Current Liabilities	\( 222,000	\) 244,000
Long-term Liabilities	113,000	92,000
Total Liabilities	335,000	336,000

Stockholders’ Equity
Preferred Stock, 4%	92,000	92,000
Common Stockholders’ Equity, no par	153,000	132,000	85,000
Total Liabilities and Stockholders’ Equity	\( 580,000	\) 560,000

ABC ATHLETIC SUPPLY, INC. Five-Year Financial Summary (Partial; adapted)
(Dollar amounts in thousands except per share data)	2018	2017	2016	2015	2014	2013
Net Sales Revenue	\(250,000	\)216,000	\(191,000	\)161,000	\(134,000
Net Sales Revenue Increase	16%	13%	19%	20%	17%
Domestic Comparative Store Sales Increase	5%	6%	4%	7%	9%
Other Income—Net	2,110	1,840	1,760	1,690	1,330
Cost of Goods Sold	189,250	164,592	148,216	126,385	106,396
Selling and Administrative Expenses	41,210	36,330	31,620	27,440	22,540
Interest:
Interest Expense	(1,080)	(1,380)	(1,400)	(1,020)	(830)
Interest Income	125	165	155	235	190
Income Tax Expense	4,470	3,900	3,700	3,320	2,700
Net Income	16,225	11,803	7,979	4,760	3,054
Per Share of Common Stock:
Net Income	1.60	1.30	1.20	1.00	0.78
Dividends	0.40	0.38	0.34	0.30	0.26
Financial Position
Current Assets, Excluding Merchandise Inventory	\)30,700	\(27,200	\)26,700	\(24,400	\)21,500
Merchandise Inventory	24,500	22,600	21,700	19,000	17,500	$16,700
Property, Plant, and Equipment, Net	51,400	45,200	40,000	35,100	25,600
Total Assets	106,600	95,000	88,400	78,500	64,600
Current Liabilities	32,300	28,000	28,300	25,000	16,500
Long-term Debt	23,000	21,500	17,600	19,100	12,000
Stockholders’ Equity	51,300	45,500	42,500	34,400	36,100
Financial Ratios
Acid-Test Ratio	1.0	1.0	0.9	1.0	1.3
Rate of Return on Total Assets	17.2%	14.4%	11.2%	8.1%	7.1%
Rate of Return on Common Stockholders’ Equity	35.5%	26.%	20.8%	13.5%	13.0%

Briefly describe the ratios that can be used to evaluate a company’s ability to sell merchandise inventory and collect receivables.

Short Answer

Step by step solution

Meaning of Ratio

Explanation of some ratios use by the companies

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