Question

Cullumber Medical manufactures hospital beds and other institutional furniture. The company’s comparative balance sheet and income statement for 2015 and 2016 follow.

Cullumber Medical Comparative Balance Sheet As of December 31
		2016		2015
Assets
Current assets
Cash		$397,000		$417,450
Accounts receivable, net		1,089,000		776,400
Inventory		733,000		681,050
Other current assets		381,400		247,100
Total current assets		2,600,400		2,122,000
Property, plant, & equipment, net		8,616,245		8,439,830
Total assets		$11,216,645		$10,561,830
Liabilities and Stockholders’ Equity
Current liabilities		$3,156,000		$2,846,050
Long-term debt		3,702,600		3,892,600
Total liabilities		6,858,600		6,738,650
Preferred stock, $5 par value		58,900		58,950
Common stock, $0.25 par value		104,650		103,850
Retained earnings		4,194,495		3,660,380
Total stockholders’ equity		4,358,045		3,823,180
Total liabilities and stockholders’ equity		$11,216,645		$10,561,830

Cullumber Medical Comparative Income Statement and Statement of Retained Earnings For the Year
		2016		2015
Sales revenue (all on account)		$10,177,300		$9,613,950
Cost of goods sold		5,612,300		5,298,700
Gross profit		4,565,000		4,315,250
Operating expenses		2,840,250		2,634,200
Net operating income		1,724,750		1,681,050
Interest expense		300,300		308,650
Net income before taxes		1,424,450		1,372,400
Income taxes (30%)		427,335		411,720
Net income		$997,115		$960,680
Dividends paid
Preferred dividends		29,550		29,500
Common dividends		433,450		413,100
Total dividends paid		463,000		442,600
Net income retained		534,115		518,080
Retained earnings, beginning of year		3,660,380		3,142,300
Retained earnings, end of year		$4,194,495		$3,660,380

alculate the following liquidity ratios for 2016. (Round average collection period to 0 decimal place, e.g. 25 and inventory turnover ratio to 2 decimal places, e.g. 5.12. Use 365 days for calculation.)

a.	Average collection period		days
b.	Inventory turnover		times

Answer 1

Ans. A	Average collection period   =   No. of days in year / Net credit sales * Average accounts receivables
	365 / $10,177,300 * $932,700
	33 days
	*Average receivable = (Beginning receivables + Ending receivables) / 2
	($776,400 + $1,089,000) / 2
	$932,700
Ans. B	Inventory turnover = Cost of goods sold / Average Inventory
	$5,612,300 / $707,025
	7.94	times
	*Average inventory = (Beginning inventory + Ending inventory) / 2
	($681,050 + $733,000) / 2
	$707,025