Hello,
Please note that in the question, it specifically states that you need to use the "Year End figures".
Moreover, since you need to compare and find out if there was an increase/decrease, you can't use the average, as that would only give you the Ratios, but you wont have a benchmark ratio to compare it against.
Hope I could clarify it for you.
Thanks.
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AISHWARYA LAKHOTIA
Student
HOWRAH
India
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Original Message:
Sent: 10-03-2021 12:45 PM
From: Muhammad Usman Cheema
Subject: Activity Measures and Financing CMA Part 2
Dear All,
in the below question, why Average Inventory was not 4.5M for Inventory Turnover, and why the Average Account Receivables were not 3.5M for AR Turnover.
The following financial information is given (in millions of dollars): | Prior Year | Current Year | | | | Sales | $10 | $11 | Cost of goods sold | 6 | 7 | Current assets: | | | Cash | 2 | 3 | Accounts receivable | 3 | 4 | Inventory | 4 | 5 |
Based on year-end figures for assets, between the prior year and the current year, did the days' sales in inventory and days' sales in receivables increase or decrease? Assume a 365-day year. |
| | | Days' Sales | Days' Sales | | | in Inventory | in Receivables | | | | |
| | | | | | | Answer (C) is correct.
Inventory turnover ratio for the current year can be calculated as follows:Inventory turnover | = | Cost of goods sold ÷ Average inventory | | = | $7,000,000 ÷ $5,000,000 | | = | 1.4 times | Days' sales in inventory | = | 365 ÷ 1.4 = 260.71 |
For the prior year:Inventory turnover ratio | = | $6,000,000 ÷ $4,000,000 = 1.5 times | Days' sales in inventory | = | 365 ÷ 1.5 = 243.33 |
Thus, there was an increase in days' sales in inventory.Receivables turnover ratio for the current year can be calculated as follows: AR turnover | = | Net credit sales ÷ Ending receivable | | = | $11,000,000 ÷ $4,000,000 | | = | 2.75 times | Days' sales in receivables | = | 365 ÷ 2.75 = 132.72 |
For the prior year:AR turnover | = | $10,000,000 ÷ $3,000,000 = 3.33 times | Days' sales in receivables | = | 365 ÷ 3.33 = 109.5 |
Thus, days' sales in receivables also increased. |
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