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

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