Financial Accounting, 8th Edition
Financial Accounting, 8th Edition
8th Edition
ISBN: 9780078025556
Author: Robert Libby, Patricia Libby, Daniel Short
Publisher: McGraw-Hill Education
Question
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Chapter 13, Problem 6AP

1.

To determine

Complete the given tabulation

1.

Expert Solution
Check Mark

Answer to Problem 6AP

Complete the given tabulation.

 Ratio2014201520162017
aProfit margin %(18%)8%15%11%
bGross profit ratio36%39%31%38%
cExpenses as a % of sales excluding cost of goods sold

55%

32%

16%

27%

dInventory turnover4.73.13.22.5
eDays’ supply in inventory78118114146
fReceivable turnover6.04.34.03.6
gAverage days to collect618591101

Table (1)

Explanation of Solution

Profit margin:

Profit margin ratio is used to determine the percentage of net income that is being generated per dollar of revenue or sales.

Net profit margin=NetIncomeNet Sales Revenue

Calculate the profit margin for the given years.

 particulars2014201520162017
aNet income(8)51211
bNet sales revenue446680100
cProfit margin (a÷b)(18%)8%15%11%

Table (2)

Gross Profit Ratio:

Gross profit is the financial ratio that shows the relationship between the gross profit and net sales. It represents gross profit as a percentage of net sales. Gross Profit is the difference between the net sales revenue, and the cost of goods sold. It can be calculated by dividing gross profit and net sales.

Gross profit ratio=Gross profitNet sales×100

Calculate the gross profit ratio for the given years.

 particulars2014201520162017
aNet sales revenue446680100
bLess: Cost of goods sold28405562
cGross profit16262538
cGross Profit ratio (c÷a)×10036%39%31%38%

Table (3)

Calculate the expenses as a percentage of sales excluding cost of goods sold for the given years.

 particulars2014201520162017
aNet sales revenue446680100
bLess: Cost of goods sold28405562
cLess: net income(8)51211
dOperating expenses 8211327
eExpense as a % of sales (d÷a)×10055%32%16%27%

Table (4)

Inventory turnover ratio:

Inventory turnover ratio is used to determine the number of times inventory used or sold during the particular accounting period.

Inventory Turnover Ratio =Cost of Goods Sold Average Inventory

Calculate the inventory turnover ratio for the given years.

 particulars2014201520162017
aCost of goods sold28405562
bBeginning inventory0121420
c Ending inventory12142030
dAverage inventory (b+c)÷26131725
dInventory turnover ratio (a÷d)4.73.13.22.5

Table (5)

Average days in inventory:

Average days’ in inventory is determined as the number of days a particular company takes to make sales of the inventory available with them.

Average days’ in inventory=365daysInventory turnover

Calculate days’ supply in inventory for the given years.

 particulars2014201520162017
aInventory turnover ratio (refer table (5))4.73.13.22.5
bDays in a year 365365365365
cDays’ supply in inventory (b÷a)78118114146

Table (6)

Receivables turnover ratio:

Receivables turnover ratio is mainly used to evaluate the collection process efficiency. It helps the company to know the number of times the accounts receivable is collected in a particular time period. This ratio is determined by dividing credit sales and sales return.

Receivables Turnover Ratio=Net SalesAverageAccountsReceivables

Calculate the receivables turnover ratio for the given years.

 particulars2014201520162017
aNet sales revenue446680100
bBeginning receivables0111218
c Ending receivables11121824
dAverage receivables (b+c)÷25.511.51521
dReceivables turnover ratio (a÷d)6.04.34.03.6

Table (7)

Average collection period:

This ratio is used to determine the number of days a particular company takes to collect accounts receivables.

Average days’ in collection period=365daysInventory turnover

Calculate the average collection period for the given years.

 particulars2014201520162017
areceivables turnover ratio (refer table (7))6.04.34.03.6
bDays in a year 365365365365
cAverage collection period (b÷a)618591101

Table (8)

2.

To determine

Identify the favourable or unfavourable factors by evaluating the results of the related ratios (a) (b) and (c). Recommend the company to improve its operations.

2.

Expert Solution
Check Mark

Explanation of Solution

Identify the favourable or unfavourable factors by evaluating the results of the related ratios (a) (b) and (c).

  • Sales revenue is increased progressively each year.
  • Profit margin is increased, but in the last year it is decreased.
  • Gross profit margin is changing every year, but it is increased in the last year.
  • Expense as a % of sales are decreased more than expected.

To improve its operations, the Company should concentrate on the net income trend and workout to reduce the expenses and increase the profit margin.

3.

To determine

Identify the favourable or unfavourable factors by evaluating the results of the related ratios (d) (e) (f) and (g). Recommend the company to improve its operations.

3.

Expert Solution
Check Mark

Explanation of Solution

Identify the favourable or unfavourable factors by evaluating the results of the related ratios (d) (e) (f) and (g).

  • The inventory turnover ratio reflects that the inefficiency of the management to maintain the proper inventory. There is absence of the inventory control.
  • The receivables turnover ratio indicates that the company’s inefficiency to collect the accounts receivables from the customers. There is an increasing trend in the average collection period.

It is recommended that the management should revise its inventory controls and receivables collection activities. The management need to develop its own policies that will improve the Company’s inventory and receivables turnover ratios.

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