Question

The following data (in millions) were adapted from recent financial statements of CVS Health Corporation (CVS)

1. Compute the accounts receivable turnover for Years 1 and 2. Round to one decimal place.

	Accounts Receivable Turnover
Year 2
Year 1

2. Compute the number of days' sales in receivables for Years 1 and 2. Assume there are 365 days in the year, and round to the nearest day.

	Number of Days' Sales in Receivables
Year 2	days
Year 1	days

3. Compute the inventory turnover for Years 1 and 2. Round to one decimal place.

	Inventory Turnover
Year 2
Year 1

4. Compute the number of days' sales in inventory for Years 1 and 2. Assume there are 365 days in the year, and round to the nearest day.

	Number of Days' Sales in Inventory
Year 2	days
Year 1	days

5. Compute the return on sales for Years 1 and 2. Round to one decimal place.

	Return on Sales
Year 2	%
Year 1	%

6. All of the following are true regarding the accounts receivable and inventory analyses for CVS except:

The management of receivables and inventories remained approximately the same in Years 1 and 2.

The days' sales in inventory has decreased from year 1 to year 2, which is an unfavorable change.

The days' sales in receivables increased from year 1 to year 2, which is an unfavorable change.

The inventory turnover increased from year 1 to year 2 which caused the days' sales in inventory to decrease.

Choose the correct answer:

	Year 2			Year 1
Sales		$139,367			$126,761
Cost of goods sold		114,000			102,978
Operating income		8,799			8,037
Average accounts receivable		10,152			8,402
Average inventory		11,488			11,039

Answer 1

Answer 1.

Year 2:

Accounts Receivable Turnover = Sales / Average Accounts Receivable
Accounts Receivable Turnover = $139,367 / $10,152
Accounts Receivable Turnover = 13.7 times

Year 1:

Accounts Receivable Turnover = Sales / Average Accounts Receivable
Accounts Receivable Turnover = $126,761 / $8,402
Accounts Receivable Turnover = 15.1 times

Answer 2.

Year 2:

Number of Days’ Sales in Receivables = 365 / Accounts Receivable Turnover
Number of Days’ Sales in Receivables = 365 / 13.7
Number of Days’ Sales in Receivables = 27 days

Year 1:

Number of Days’ Sales in Receivables = 365 / Accounts Receivable Turnover
Number of Days’ Sales in Receivables = 365 / 15.1
Number of Days’ Sales in Receivables = 24 days

Answer 3.

Year 2:

Inventory Turnover = Cost of Goods Sold / Average Inventory
Inventory Turnover = $114,000 / $11,488
Inventory Turnover = 9.9 times

Year 1:

Inventory Turnover = Cost of Goods Sold / Average Inventory
Inventory Turnover = $102,978 / $11,039
Inventory Turnover = 9.3 times

Answer 4.

Year 2:

Number of Days’ Sales in Inventory = 365 / Inventory Turnover
Number of Days’ Sales in Inventory = 365 / 9.9
Number of Days’ Sales in Inventory = 37 days

Year 1:

Number of Days’ Sales in Inventory = 365 / Inventory Turnover
Number of Days’ Sales in Inventory = 365 / 9.3
Number of Days’ Sales in Inventory = 39 days

Answer 5.

Year 2:

Return on Sales = Operating Income / Sales
Return on Sales = $8,799 / $139,367
Return on Sales = 6.3%

Year 1:

Return on Sales = Operating Income / Sales
Return on Sales = $8,037 / $126,761
Return on Sales = 6.3 times

Answer 6.

The inventory turnover increased from year 1 to year 2 which caused the days' sales in inventory to decrease.