Question

​(Evaluating liquidity​) The Tabor Sales Company had a gross profit margin​ (gross profits ÷ ​sales) of 30.0 percent and sales of ​$9.0 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 ​$1.5 ​million, its current liabilities equal ​$300,000​, and it has ​$100,000 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 20 ​days, what will be its new level of accounts​ receivable?

c. ​Tabor's inventory turnover ratio is 9.0 times. What is the level of​ Tabor's inventories?

Answer 1

a. Credit sale = 9,000,000 * 75% = 6,750,000

Accounts receivable turnover ratio = Credit sales / Average accounts receivable = 6,750,000/ 562,500 = 12 times

Average collection period = 365 / Accounts receivable turnover ratio =  365 / 12 = 30.42 days

b. Accounts receivable turnover ratio = 365 / 20 = 18.25 days

New accounts receivable level = 6,750,000/ 18.25 = 369,863.01

c. Cost of goods sold = 9,000,000 * (1-30%) = 6,300,000

Inventory level = 6,300,000/ 9 = 700,000