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

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