Question

​(Evaluating liquidity​) The Tabor Sales Company had a gross profit margin​ (gross profits divided by ​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 comma 000​, and it has ​$100 comma 000 in cash plus marketable securities.

a. If​ Tabor's accounts receivable are ​$562 comma 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)-Average Collection Period

Average Collection Period = Accounts Receivables / Average Credit Sales per day

= $562,500 / [($9,000,000 x 75%) / 365 Days]

= $562,500 / $18,493.1507 per day

= 30.42 Days

(b)-New Level of Accounts Receivables

Average Collection Period = Accounts Receivables / Average Credit Sales per day

20.00 Days = Accounts Receivables / $18,493.1507 per day

Accounts Receivables = $18,493.1507 per day x 20.00 Days

Accounts Receivables = $369,863.01

(c)- level of Tabor's inventories

Cost of goods sold Ratio = 100% - Gross Profit Ratio

= 100% - 30%

= 70%

Cost of goods sold = Total Sales x Cost of goods sold Ratio

= $9,000,000 x 70%

= $6,300,000

Inventory Turnover ratio = Cost of goods sold / Inventories

9.00 Times = $6,300,000 / Inventories

Inventories = $6,300,000 / 9.00 Times

Inventories = $700,000.00