Question

In: Accounting

A company has revenues of $450,000, cost of goods sold of $250,000, and operating expenses of...

A company has revenues of $450,000, cost of goods sold of $250,000, and operating expenses of $150,000. Its average current assets are $200,000 of which $75,000 is inventory and $20,000 are prepaid items. Of its liquid assets, 30 percent is cash and the remainder is accounts receivable. Its average total assets are $500,000 and its average total owners’ equity is $400,000. Seventy-five percent of its liabilities are current. Of the current liabilities, 80 percent is accounts payable. What are the return on investment, gross margin, quick, and return on owners’ equity ratios? What are the activity ratios and related days in the cycles?

Solutions

Expert Solution

Return on Investment = Net Income /Average Total Assets

Net Income = 450,000 -250,000 - 150,000 = 50,000

Average Total Assets = 500,000

Return on Investment = 50,000/500,000 = 10%

Gross Margin Ratio = Gross Margin/Sales Revenue

Gross Margin = 450,000 - 250,000 = 200,000

Sales Revenue = 450,000

Gross margin ratio = 200,000/450,000 = 44.44%

Quick ratio = quick assets/Current liabilities

Quick Assets = 200,000 - 75,000 - 20,000 = 105,000

Current Liabilities = 100,000 x 0.75 = 75,000

Quick ratio= 105,000/75,000 = 1.4 to 1

Return on owners’ equity ratio = Net Income / Total Owners Equity

Return on owners’ equity ratio = 50,000/400,000 = 12.5%

Accounts receivable turnover = Sales/Accounts Receivable

Accounts Receivable = 105,000 x 0.7 = 73,500

Accounts receivable turnover = 450,000/73,500 = 6.12

Days in the collection cycle = 365/Accounts Receivable Turnover

Days in the collection cycle = 365/6.1224 = 59.62 days

Inventory turnover = 250,000/75,000 = 3.33

Days in the selling cycle = 365/Inventory Turnover

Days in the selling cycle = 365/3.33 = 109.50 days

Accounts payable turnover = Cost of Goods Sold/Accounts Payable

Accounts Payable = 75,000 x 0.8 = 60,000

Accounts payable turnover = 250,000/60,000 = 4.17

Days in the payment cycle = 365/Accounts Payable turnover

Days in the payment cycle = 365/4.17 = 87.6 Days


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