Question

Exercise 13-8 Selected Financial Ratios [LO13-2, LO13-3, LO13-4]

The financial statements for Castile Products, Inc., are given below:

Castile Products, Inc. Balance Sheet December 31
Assets
Current assets:
Cash				$	23,000
Accounts receivable, net					220,000
Merchandise inventory					390,000
Prepaid expenses					6,000
Total current assets					639,000
Property and equipment, net					870,000
Total assets				$	1,509,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities				$	230,000
Bonds payable, 11%					380,000
Total liabilities					610,000
Stockholders’ equity:
Common stock, $10 par value				$	120,000
Retained earnings					779,000
Total stockholders’ equity					899,000
Total liabilities and equity				$	1,509,000

Castile Products, Inc. Income Statement For the Year Ended December 31
Sales	$	2,870,000
Cost of goods sold		1,224,000
Gross margin		1,646,000
Selling and administrative expenses		590,000
Net operating income		1,056,000
Interest expense		41,800
Net income before taxes		1,014,200
Income taxes (30%)		304,260
Net income	$	709,940

     Account balances at the beginning of the year were: accounts receivable, $190,000; and inventory, $290,000. All sales were on account.

Required:

Compute the following financial data and ratios:

6.	Average collection period. (Use 365 days in a year. Round your answer to 1 decimal place.)

       

7.	Average sale period. (Use 365 days in a year. Round your intermediate and final answer to 1 decimal place.)

       

8.	Operating cycle. (Round your intermediate calculations and final answers to 1 decimal place.)

       

Answer 1

6. Accounts receivable turnover = Sales on account/ Average accounts receivable

= 2,870,000 / [ ($190,000 + 220,000 )/2]

= 14

Average collection period = 365 / Accounts receivable turnover

= 365 / 14

= 26.071

7.

Average sale period =

Inventory turnover = Cost of goods sold / Average inventory

= 1,224,000 / [ (290000 + 390,000 )/2]

= 3.6 Times

Average sale period = 365 / Inventory turnover ratio

= 365 / 3.6

= 101.39

8. Operating cycle = Average collection period + Average sale period

= 26.071 + 101.39

= 127.46