Question

1. The average of number days taken to collect debts from credit customers indicates the efficiency of collection. The shorter the number of days, the greater the efficiency. The average collection period is obtained by dividing the average accounts receivable by the daily average credit sales. For Smith & Co. the average collection period is 28 days and average accounts receivable is $196000. The company’s daily average credit is:

2. When the cost of goods sold is divided by the average inventory of an organisation, the figure obtained is a rough measure of know many times the inventory is replaced per year. If for an organisation the inventory turnover is six times a year when the cost of goods sold is $26400, its average inventory is:

3.The average days of an operating cycle is the total number of days taken to convert cash to inventory and back to cash again. It is obtained by adding the average number of days to turnover inventories and the average collection period. The operating cycle of a company with an inventory turnover of five per year and collection period of 25 days, assuming a 365-day year is:

Answer 1

1. First we have to find the Revenue by using the formula, average collection period=(accounts receivable/Revenue)*365

28=($196000/Revenue)*365

Revenue=$196000*365/28=$2,555,000

The company's average daily credit=Accounts receivables/Revenue=$196000/$2555000=0.077

2. If Inventory turnover ratio=6

Then, Inventory turnover=Cost of good sold/Average Inventory

Average Inventory=Cost of goods sold/Inventory turnover=$26400/6=$4,400

3. Operating Cycle=average inventory days+average collection period days

average inventory days=365/Inventory turnover ratio=365/5=73 days

average collection period=25 days

Operating cycle=73+25=98 days