Question

Provide calculations and show steps for each:

Average Collection Period

Average Accounts Receivables/Net Credit Sales

2018 = 11,721/79,040 =

2019 = 12,046/90,621 =

Total Asset turnover

Net Sales/Average Total Assets

2018 = 90,621/118,007 =

2019 = 79,040/124,193 =

Debt Ratio

Total Debt/Total Assets

2018 = 53,521/111,820 =

2019 = 51,871/124,193 =

Times interest earned

EBIT/Total Interest

2018 = -2,926/-2,353 =

2019 = -2,181/-2,170 =

Answer 1

1) Average Collection Period

Average collection period is defined as the average number of days required to collect the amount from the customers. It also measures how the company is giving credit to the customers and how they collect the billed amount from the customers.

Average Collection Period = (Average account receivables /  Net credit sales) x 365

The steps to calculate the Average collection period :-

STEP 1

First we want to calculate the Average account receivables.

For calculating the averge account receivable, add the starting and ending account receivable of an year. Then we have to divide it by 2. If the amount is given directly we can use the amount directly.

In this problem, In the year 2018 the average account receivable =  11,721

In the year 2019,  the average account receivable = 12,046

STEP 2

Divide the average account receivable with net credit sales.

In this problem, In the year 2018, the net credit sales= 79,040

In the year 2019, the net credit sales= 90,621

STEP 3

Average Collection Period = (Average account receivables /  Net credit sales) x 365

In the year 2018, Average Collection Period = (11,721/ 79,040) X 365

= 0.148 X 365 = 54 days

This means that the customers will pay the amount on every 54 days on averge.

In the year 2019, Average Collection Period = (12,046/90,621) x 365

= 0.133 x 365 = 48.5 = approx ( 49 ) days

This means that the customers will pay the amount on every 49 days on averge.

2) Total Asset turnover

Asset turnover ratio explains how company uses the total assets to generate sales.

Total Asset turnover = Net Sales/Average Total Assets

STEP 1

First we want to calculate the net sales of the company. In some problems, the gross sales and sales return is given then to calculate the net sales we have to substract gross sales with sales return. Or the net sales is directly given, we can directly apply the amount.

In this problem, In the year 2018,the Net sales = 90,621

In the year 2019, the Net sales = 79,040

STEP 2

Next we want to calculate Average Total Assets. For calulating  Average Total Assets, add the starting and ending total assets of the year.

In this problem, In the year 2018, Average Total Assets = 118,007

In the year 2019, Average Total Assets = 124,193

STEP 3

Total Asset turnover = Net Sales/Average Total Assets

In the year 2018, Total Asset turnover = 90,621/ 118,007 = 0.767 = 77%

This means that the company is using 77% of the assets efficiently.

In the year 2019, Total Asset turnover = 79,040/124,193 = 0.636 = 64%

This means that the company is using 64% of the assets efficiently. \

3) Debt Ratio

The debt ratio is defined as  the ratio between total debt and the total asset. It explains how much asset of the company must be sold to pay back the liability.

Debt Ratio = Total Debt/Total Assets

STEP 1

First, we want to calculate the total debt or liability of the company.

STEP 2

Then we want to calculate the total asset of the company.

STEP 3

Debt Ratio = Total Debt/Total Assets

In the year 2018, Debt Ratio = 53,521/111,820 = 0.479

In the year 2019, Debt Ratio =  51,871/124,193 = 0.418

If the Debt ratio is lower, the company is less risky or the company has lower overall debt. If the company is having the ratio less than or equal to 0.5 then the company is less risky.

4) Times interest earned

This ratio is also called interest coverage ratio. It is defined as the ability of the company to pay the debt based on the income of the company.

Times interest earned =  EBIT/Total Interest

STEP 1

First we want to calculate the earnings before interest and tax.

EBIT= Net income + interest + tax or EBIT = Total revenue - cost of goods sold - Operating Expense

STEP 2

Then we want to calculate the total interest.

STEP 3

Times interest earned =  EBIT/Total Interest

In the year 2018, Times interest earned = -2,926/-2,353 = 1.24

The ratio is 1.24 means the company can make income to pay their interest expense 1.24 times over.

In the year 2019, Times interest earned = -2,181/-2,170 = 1.00

This means the company can make income to pay their interest expense 1 times over.

Higher the ratio higher will be the financial position of the company.