# CMA Study Group

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## CMA part 2 #### Tayba Al-Mehdar12 days ago #### Ashvin Kulkarni11 days ago  • #### 1.  CMA part 2

Posted 12 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
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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• #### 2.  RE: CMA part 2

Posted 11 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.

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Ashvin Kulkarni
Accountant
Pune
India
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• #### 3.  RE: CMA part 2

Posted 11 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 days ago
this is because in the question they have specifically said "based on year end assets"