In: Accounting
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?
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