Question

(Evaluating liquidity) The Tabor Sales Company had a gross profit margin (gross profits divided by ÷sales) of 30.4 percent and sales of $9.2 million last year. Seventy-five percent of the firm's sales are on credit and the remainder are cash sales. Tabor's current assets equal $2.1 million, its current liabilities equal $319,000, and it has $99,000 in cash plus marketable securities.

a. If Tabor's accounts receivable are $562,500, what is its average collection period?

b. If Tabor reduces its average collection period to 19 days, what will be its new level of accounts receivable?

**c.** Tabor's inventory turnover ratio is 9.5
times. What is the level of Tabor's inventories?

Answer #1

a. first let us find out the net credit sales

=> total sale * credit sale proportion

=>$9.2 million * 75%

=>$6.9 million

=>$6,900,000

Tabor's accounts receivable turnover ratio = credit sales / accounts receivable

=>$6,900,000 / $562,500

=>12.27

average collection period = 365 days / account receivable turnover ratio

=>365 / 12.27

=>29.75.

b. new level of accounts receivable = credit sales * (average collectio period)/ 365 days

=>$6,900,000 * (19 /365)

=>$359,178.08.

c.cost of goods sold = sales* (1- gross profit ratio)

=>$9.2 million * (1 - 0.304)

=>$6,403,200

inventory level = cost of goods sold / inventory turnover

=>$6,403,200 / 9.5 times

=>$674,021.05.

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