Question

Simon Company’s year-end balance sheets follow. At December 31 Current Yr 1 Yr Ago 2 Yrs Ago Assets Cash $ 26,088 $ 30,494 $ 31,765 Accounts receivable, net 89,100 62,800 50,100 Merchandise inventory 112,500 84,500 53,000 Prepaid expenses 8,401 8,005 3,529 Plant assets, net 210,547 199,232 185,706 Total assets $ 446,636 $ 385,031 $ 324,100 Liabilities and Equity Accounts payable $ 110,100 $ 64,420 $ 42,353 Long-term notes payable secured by mortgages on plant assets 83,128 87,672 70,910 Common stock, $10 par value 162,500 162,500 162,500 Retained earnings 90,908 70,439 48,337 Total liabilities and equity $ 446,636 $ 385,031 $ 324,100 The company’s income statements for the Current Year and 1 Year Ago, follow. Assume that all sales are on credit: For Year Ended December 31 Current Yr 1 Yr Ago Sales $ 580,627 $ 458,187 Cost of goods sold $ 354,182 $ 297,822 Other operating expenses 179,994 115,921 Interest expense 9,871 10,538 Income tax expense 7,548 6,873 Total costs and expenses 551,595 431,154 Net income $ 29,032 $ 27,033 Earnings per share $ 1.79 $ 1.66 (1-a) Compute days' sales uncollected. (1-b) For each ratio, determine if it improved or worsened in the current year. (2-a) Compute accounts receivable turnover. (2-b) For each ratio, determine if it improved or worsened in the current year. (3-a) Compute inventory turnover. (3-b) For each ratio, determine if it improved or worsened in the current year. (4-a) Compute days' sales in inventory. (4-b) For each ratio, determine if it improved or worsened in the current year.

Answer 1

1a.

Days sales uncollected = Accounts receivable / Credit sales 365 days

Current year = $89,100 / $580,627 365 = 56.01 days

1 year ago = $62,800 / $458,187 365 = 50.03 days

1b.

The situation has worsened in current year as compared to previous year

2a.

Accounts receivable turnover = Credit sales / Average accounts receivable

Current year = $580,627 / $75,950 ($62,800+89,100 /2) = 7.64

1 year ago = $458,187 / $56,450 ($50,100+62,800 /2) = 8.12

2b

The situation has worsened in current year as compared to previous year

3a.

Inventory turnover = Cost of goods sold / Average inventory

Current year = $354,182 / $98,500 ($84,500+112,500 /2) = 3.6

1 year ago = $297,822 / $68,750 ($53,000+84,500 /2) = 4.33

3b.

The situation has worsened in current year as compared to previous year

4a.

Days sales in inventory = Inventory / Cost of goods sold 365 days

Current year = $112,500 / $354,182 365 = 116 days

1 year ago = $84,500 / $297,822 365 = 103.56 days

4b.

The situation has worsened in current year as compared to previous year.