Question

Exercise 13-8 Selected Financial Ratios [LO13-2, LO13-3, LO13-4]

The financial statements for Castile Products, Inc., are given below:

Castile Products, Inc. Balance Sheet December 31
Assets
Current assets:
Cash				$	23,000
Accounts receivable, net					220,000
Merchandise inventory					390,000
Prepaid expenses					6,000
Total current assets					639,000
Property and equipment, net					870,000
Total assets				$	1,509,000
Liabilities and Stockholders' Equity
Liabilities:
Current liabilities				$	230,000
Bonds payable, 11%					380,000
Total liabilities					610,000
Stockholders’ equity:
Common stock, $10 par value				$	120,000
Retained earnings					779,000
Total stockholders’ equity					899,000
Total liabilities and equity				$	1,509,000

Castile Products, Inc. Income Statement For the Year Ended December 31
Sales	$	2,870,000
Cost of goods sold		1,224,000
Gross margin		1,646,000
Selling and administrative expenses		590,000
Net operating income		1,056,000
Interest expense		41,800
Net income before taxes		1,014,200
Income taxes (30%)		304,260
Net income	$	709,940
Account balances at the beginning of the year were: accounts receivable, $190,000; and inventory, $290,000. All sales were on account. Required: Compute the following financial data and ratios:

6.	Average collection period. (Use 365 days in a year. Round your answer to 1 decimal place.)

       

7.	Average sale period. (Use 365 days in a year. Round your intermediate and final answer to 1 decimal place.)

       

8.	Operating cycle. (Round your intermediate calculations and final answers to 1 decimal place.)

Answer 1

6) aveeage collection period

First we need to calculate averagr accounts receicable, then we need to calculate average collection period

Average accounts receivable =begining A/R +endA/R divided by 2 years

So  190000+220000 =205000

2

Now we need to calculate accounts receivable turn over ratio

Accounts receivable turn over ratio=net sales

average accountts receivables

1646000= 8.02

205000

now will calculate average collecction period

365 divided by accounts receivable turn over ratio

365 divided by 8 = 45.62 if we round it wil come 46 days

7)average sales period

we need to calccalculate avergage inventory

Average inventory =begining inventory +ending inventory divided by 2 years

So average inventory will be 390000+290000 divided by 2 =340000

Now we need to calculate inventory tturn over ratio

Inventory turn over ratio =net sales divided by average inventory

1646000 divided by 340000= 5

so now wil calculculate average sales period

Average sales period= number of days in a year divided by inventory turn over ratio

365 divided by 5 =73 days

8)operating cycle

operatingcycle= inventory period+accounts receivable period

So 46+73=119 DAYS