Question

The 2021 income statement of Anderson Medical Supply Company reported net sales of $8 million, cost of goods sold of $4.8 million, and net income of $800,000. The following table shows the company’s comparative balance sheets for 2021 and 2020:

Some industry averages for Anderson’s line of business are

Inventory turnover ........................5 times
Average collection period ............25 days
Asset turnover ..............................1.8 times

 

Required:
1. Determine the following ratios for 2021:
a. Inventory turnover
b. Receivables turnover
c. Average collection period
d. Asset turnover
2. Assess Anderson’s asset management relative to its industry.

Answer 1

1.

Turnover ratios for Anderson Medical Supply Company for 2021:

 

Inventory turnover ratio          =                    $4,800,000                                                                        [$900,000 + 700,000] ÷ 2                                                  =                       6 times

 

Receivables turnover ratio       =                    $8,000,000                                                                        [$700,000 + 500,000] ÷ 2                                                  =                    13.33 times

 

Average collection period        =                          365                                                                                             13.33                                                  =                     27.4 days

 

Asset turnover ratio                =                    $8,000,000                                                                      [$4,300,000 + 3,700,000] ÷ 2                                                  =                       2 times

 

2.

The company turns its inventory over 6 times per year compared to the industry average of 5 times per year. The asset turnover ratio also is slightly better than the industry average (2 times per year versus 1.8 times). These ratios indicate that Anderson is able to generate more sales per dollar invested in inventory and in total assets than the industry averages. However, Anderson takes slightly longer to collect its accounts receivable (27.4 days compared to the industry average of 25 days).

The company turns its inventory over 6 times per year compared to the industry average of 5 times per year