Question

1 Last year a company reported sales of $ 10 million and an inventory turnover ratio of 5. It is now adopting a new inventory system. If the new system is able to reduce the firm's inventory level and increase the firm's inventory turnover ratio to 8 while maintaining the same level of sales, how much cash will be freed up?

2 A company has days sales outstanding of 18 days. It averages $ 6,500 in credit sales every day. What is the company's average accounts receivable?

Answer 1

Solution to the QUESTION-1

The Average inventory if the Inventory turnover ratio is 5 Times

The Average inventory = Cost of goods sold / Inventory turnover ratio

= $10,000,000 / 5 Times

= $2,000,000

The Average inventory if the Inventory turnover ratio is 8 Times

The Average inventory = Cost of goods sold / Inventory turnover ratio

= $10,000,000 / 8 Times

= $1,250,000

Therefore, the amount of cash freed up = $2,000,000 - $1,250,000

= $750,000

Solution to the QUESTION-2

The company's average accounts receivable = Credit sales per day x days sales outstanding

= $6,500 per day x 18.00 Days

= $117,000