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.