Question

The financial statements of the company are shown below:

The Company
Income Statement 2017
Sales	$	10,050,000
Cost of Goods Sold		5,825,000
Depreciation Expense		580,000
Gross Profit	$	3,645,000
Selling and Administrative Expenses		2,950,000
EBIT	$	695,000
Interest Expense		275,000
Income before Tax	$	420,000
Taxes		272,000
Net Income	$	148,000

The Company
Comparative Balance Sheets
	2017			2016
Cash	$	46,000		$	41,000
Accounts Receivable		647,000			675,000
Inventory		626,000			541,000
Total Current Assets	$	1,319,000		$	1,257,000
Fixed Assets		2,200,000		$	1,535,000
Total Assets	$	3,519,000		$	2,792,000
Accounts Payable	$	324,000		$	275,000
Bank Loans		495,000			419,000
Total Current Liabilities	$	819,000		$	694,000
Long-term Bonds		1,650,000			1,225,000
Total Liabilities	$	2,469,000		$	1,919,000
Common Stock (200,000 shares)		200,000			200,000
Retained Earnings		850,000			673,000
Total Equity	$	1,050,000		$	873,000
Total Liabilities and Equity	$	3,519,000		$	2,792,000

Note: The common shares are trading in the stock market for $20 per share.

Refer to the financial statements of The Company. The industry average ACP is 30 days. How is The Company doing in its collections relative to the industry? (Please keep in mind that when a ratio involves both income statement and balance sheet numbers, the balance sheet numbers for the beginning and end of the year must be averaged.)

Multiple Choice

• The Company's receivables are outstanding about 9 fewer days than the industry average.

• The Company's receivables are outstanding about 5 more days than the industry average.

• The Company's receivables are outstanding about 8 more days than the industry average.

• The Company's receivables are outstanding about 6 fewer days than the industry average.

Answer 1

The Company's receivables are outstanding about 5 more days than the Industry average.

Accounts Collection period=Average receivables/Cr.sales*365

Average Receivables=647000+675000/2=$984,500

Credit Sales=$10,050,000

Accounts Collection period=($984,500/$10,050,000)*365=35.75547(the number varies slightly when it comes to the decimals if 360 days are assumed instead of 365)

The Industry average is given as 30 days .So the company's receivables are outstanding about 5 more days than the Industry average.