Question

Financial statement information is provided for the three years ending December 31, 2015, 2016 and 2017.

	2017	2016	2015
Cash	$443,550	$355,750	$142,800
Accounts Receivable	$59,600	$62,500	$58,400
Merchandise Inventory	$87,000	$90,100	$85,000
Prepaid Expenses	$6,400	$5,800	$5,800
Notes Receivable, due in 2018	$5,000	$5,500	$5,000
Property, Plant & Equipment	$580,175	$518,525	$528,950
Accumulated Depreciation	$114,175	$96,525	$97,950
Accounts Payable	$16,900	$17,800	$15,000
Unearned Sales	$6,100	$6,500	$7,400
Notes Payable, due in 2017	$119,000	$126,000	$124,000
I.C. Rhodes, Capital	$1,075,550	$931,350	$701,600
I.C. Rhodes, Withdrawals	$150,000	$140,000	$120,000
Sales	$431,900	$525,900	$556,300
Cost of Goods Sold	$130,200	$168,100	$219,100
Operating Expenses	$167,500	$148,050	$206,750

1.      Calculate the following ratios for 2017.  Round all ratios to two decimals.

a.      Gross Profit Ratio b.      Merchandise Inventory Turnover

c.       Days’ Sales in Inventory d.      Quick Ratio

e.      Accounts Receivable Turnover Ratio   f.        Days’ Sales Uncollected

Gross Profit Ratio = (Gross Profit)/(Net Sales)× 100%       

Merchandise Inventory Turnover = (Cost of Goods Sold)/(Average Merchandise Inventory)

Days Sales in Inventory = (Ending Inventory)/(Cost of Goods Sold)×365   

Quick Ratio = (Quick Assets)/(Current Liabilities)

Accounts Receivable Turnover= (Net Sales)/(Average Accounts Receivable)

Days' Sales Uncollected= (Accounts Receivable)/(Net Sales)×365

2.      Using YOUR answer (from part 1), compare the ratio to the industry average provided and, state whether the change is Favourable, Unfavourable, or Neither.  (Note:  marks will not be awarded for simply guessing Favourable, Unfavourable or Neither without supporting ratio calculations.)

	2017	2016	Favourable, Unfavourable, or Neither
a)      Gross Profit Ratio		68.04
b)      Merchandise Inventory Turnover		1.92
c)      Days Sales in Inventory		195.64
d)      Quick Ratio		17.21
e)      Accounts Receivable Turnover Ratio		8.70
f)       Days Sales Uncollected		43.38

Answer 1

1) A) Gross profit for 2017 = sales - COGS = $ 431,900 - $ 130,200 = $301,700

Gross profit ratio = [$ 301,700 / $ 431,900] X 100% = 69.85%

B) average merchandise inventory = [ opening inventory + closing inventory ] / 2

Average merchandise inventory = [ $ 90,100 + $ 87,000 ] / 2 = $ 88,550

Merchandise inventory turn over ratio for 2017 = $ 130,200 / $ 88,550 = 1.47

C) Days sales in inventory =[ $ 87,000 /$ 130,200]  X 365 = 243.89

D) Quick assets = cash + accounts receivable

Quick assets = $ 443,500 + $ 59,600 = $ 503,150

Current liabilities = accounts payable + unearned sales + note payable ( due in 2017)

Current liabilities = $ 16,900 + $ 6,100 + $ 119,000 = $ 142,000

Quick ratio for 2017 = $ 503,150 / $ 142,000 = 3.54

E) Average accounts receivable = [ Opening accounts receivables + closing accounts receivable ] / 2

Average accounts receivable = [ $ 62,500 + $ 59,600 ] / 2 = $ 61,050

Accounts receivable turn over ratio for 2017 = $ 431,900 / $ 61,050 = 7.07

F) Days sales uncollected for 2017 = [ closing accounts receivable /net Sales ] X 365

Days sales uncollected = [ $ 59,600 / $ 431,900 ] X 365 = 50.37

2) Comparison chart

	2017	2016	Label
Gross profit ratio	69.85	68.04	Favourable
Merchandise inventory turn over ratio	1.47	1.92	Unfavorable
Days sales in inventory	243.89	195.64	Unfavorable
Quick ratio	3.54	17.21	Unfavorable
Accounts receivable turn over ratio	7.07	8.70	Unfavorable
Days sales uncollected	50.37	43.38	Unfavorable