CMA Study Group

in this calculation i want to know he didnt take the average inventory and average receivable in the denominator calculation?

Question: 19	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   A. Increased Decreased B. Decreased Decreased C. Decreased Increased D. Increased Increased Answer (D) 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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Tayba Al-Mehdar
Analyst
Khobar
Saudi Arabia
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Hi Tayba,

The question says ' Based on the year end figures of assets' that is why we have to consider those as average figures.

And also we have to compare both years ratios so if we take average for the current year then we will need to take average also for the prior year which is not possible with the give data. So we have to consider the given figures as average.

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Ashvin Kulkarni
Accountant
Pune
India
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Original Message:
Sent: 10-16-2020 06:26 AM
From: Tayba Al-Mehdar
Subject: CMA part 2

in this calculation i want to know he didnt take the average inventory and average receivable in the denominator calculation?

Question: 19	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   A. Increased Decreased B. Decreased Decreased C. Decreased Increased D. Increased Increased Answer (D) 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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Tayba Al-Mehdar
Analyst
Khobar
Saudi Arabia
------------------------------

Original Message:
Sent: 10/16/2020 6:27:00 AM
From: Tayba Al-Mehdar
Subject: CMA part 2

in this calculation i want to know he didnt take the average inventory and average receivable in the denominator calculation?

Question: 19	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   A. Increased Decreased B. Decreased Decreased C. Decreased Increased D. Increased Increased Answer (D) 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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Tayba Al-Mehdar
Analyst
Khobar
Saudi Arabia
------------------------------

Original Message:
Sent: 10/16/2020 6:27:00 AM
From: Tayba Al-Mehdar
Subject: CMA part 2

in this calculation i want to know he didnt take the average inventory and average receivable in the denominator calculation?

Question: 19	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   A. Increased Decreased B. Decreased Decreased C. Decreased Increased D. Increased Increased Answer (D) 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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Tayba Al-Mehdar
Analyst
Khobar
Saudi Arabia
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