Question

1. Snow Man Inc. has accounts receivable of $4,500, inventory of $1,800, sales of $135,000, and cost of goods sold of $64,000. How many days does it take the firm to sell its inventory and collect the payment on the sale assuming that all sales are on credit? (i.e. Inventory Holding Period +  Days' sales in receivables)

   		10.27 days
   		18.67 days
   		14.50 days
   		22.43 days
   		12.17 days

Answer 1

Inventory Turnover= Cost of Goods Sold/Average Inventory

                                      = $64,000/ $1,800

                                      = 35.56 times

                      

Formula for computing number of days of inventory:

Number of days of inventory= 365/Inventory turnover

                                                       = 365/ 35.56

                                                       = 10.2643 days

Receivables turnover= Annual sales/Average receivables

                                         = $135,000/ $4,500

                                         = 30 times

Formula for computing number of days of sales:

Days of sales outstanding= 365/Receivables turnover

                                                 = 365/ 30

                                                 = 12.1667 days.

The number of days the firm takes to sell its inventory and collect the payment on sales:

= 10.2643 days + 12.1667 days

= 22.4310 days    22.43 days.

Hence, the answer is option d.

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