CMA Study Group

CMA part 2

  • 1.  CMA part 2

    Posted 4 days ago
    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
     
     
     
    Increased
    Decreased
    Decreased
    Decreased
    Decreased
    Increased
    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.


    ------------------------------
    Tayba Al-Mehdar
    Analyst
    Khobar
    Saudi Arabia
    ------------------------------


  • 2.  RE: CMA part 2

    Posted 3 days ago
    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.

    ------------------------------
    Ashvin Kulkarni
    Accountant
    Pune
    India
    ------------------------------



  • 3.  RE: CMA part 2

    Posted 3 days ago
    Hi,

    Your question seems valid however I have one doubt as there is given in question itself that "based on year end balance".

    This is the reason they have not taken the average of balance sheet itmes for inventory turnover and AR Turnover.

    If they take average the result will be different. 

    Thank you





  • 4.  RE: CMA part 2

    Posted 8 hours ago
    this is because in the question they have specifically said "based on year end assets"