Walkers World Company gathered the following information for 2019:

Total sales revenue (65% on credit) $432,000

Cost of goods sold 231,000

Sales returns and allowances (on credit) 44,000

Accounts receivable at end of 2019 ($30,000

increase during 2019) 100,000

Allowance for doubtful accounts:

Beginning of 2019 5,000

End of 2019 7,000

Merchandise inventory at end of 2019 ($10,000

decrease during 2019) 28,000

Assume 365 days in the year.

Calculate each of the following ratios.

A. Receivable turnover ratio.

B. Average age of receivables.

C. Inventory turnover ratio.

D. Average number of days' supply in inventory

A. Receivable turnover ratio. = 4.57 times

B. Average age of receivables. 94.07 days

C. Inventory turnover ratio. 7 times

D. Average number of days' supply in inventory = 633 days

Explanation:

Net Sales $ 388,000

Sales revenue (65% on credit) $432,000

Less Sales returns and allowances (on credit) 44,000

Average Accounts Receivable = Accounts Rec (beg) Accounts Rec (end) / 2

= 70,000 + 100,000/2 = $85,000

A. Receivable turnover ratio.

Receivable turnover ratio = Net Sales / Average Accounts Receivable

= 388,000 / 85,000 = 4.5647 = 4.565 = 4.57 times

A high turnover ratio is favorable because the accounts receivable are quickly collected.

B. Average age of receivables.

Average age of receivables = Accounts receivable * 365 / Sales

= 100,000 * 365/388,000 = 365,000,00/388,000 = 94.07 days

Accounts receivable will be collected in 94 days.

C. Inventory turnover ratio.

Inventory turnover ratio = Cost Of Goods Sold / Average Inventory

= 231,000/38,000 + 28,000/2

= 231,000/33,000 = 7 times

A company with a high turnover requires a smaller investment in inventory than one producing the same sales with a lower turn over.

D. Average number of days' supply in inventory

Average number of days' supply in inventory = Cost of Goods Sold / 365

= 231,000 / 365 = 632.89

More Inventory will be needed in 633 days