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Exercise 13-8 Liquidity analysis and interpretation LO P3

[The following information applies to the questions displayed below.]

Simon Company’s year-end balance sheets follow.

At December 31	2017			2016			2015
Assets
Cash	$	26,619		$	31,115		$	32,412
Accounts receivable, net		89,000			62,100			53,200
Merchandise inventory		114,500			83,000			57,000
Prepaid expenses		8,572			8,168			3,601
Plant assets, net		217,041			208,489			184,487
Total assets	$	455,732		$	392,872		$	330,700
Liabilities and Equity
Accounts payable	$	112,342		$	65,731		$	43,216
Long-term notes payable secured by mortgages on plant assets		84,821			89,457			72,354
Common stock, $10 par value		162,500			162,500			162,500
Retained earnings		96,069			75,184			52,630
Total liabilities and equity	$	455,732		$	392,872		$	330,700

The company’s income statements for the years ended December 31, 2017 and 2016, follow. Assume that all sales are on credit:

For Year Ended December 31	2017						2016
Sales				$	592,452					$	467,518
Cost of goods sold	$	361,396					$	303,887
Other operating expenses		183,660						118,282
Interest expense		10,072						10,753
Income taxes		7,702						7,013
Total costs and expenses					562,830						439,935
Net income				$	29,622					$	27,583
Earnings per share				$	1.82					$	1.70

(1) Compute days' sales uncollected.

	Days' Sales Uncollected Choose Numerator: / Choose Denominator: x Days = Days' Sales Uncollected / x = Days' Sales Uncollected 2017: / x = 0 days 2016: / x = 0 days

(2) Compute accounts receivable turnover.

	Accounts Receivable Turnover Choose Numerator: / Choose Denominator: = Accounts Receivable Turnover / = Accounts receivable turnover 2017: / = times 2016: / = times

(3) Compute inventory turnover.

	Inventory Turnover Choose Numerator: / Choose Denominator: = Inventory Turnover / = Inventory turnover 2017: / = times 2016: / = times

(4) Compute days' sales in inventory.

	Days’ Sales In Inventory Choose Numerator: / Choose Denominator: x Days = Days’ Sales In Inventory / x = Days’ sales in inventory 2017: / x = 0 days 2016: / x = 0 days

Answer 1

Answer of Part 1:

For 2016:

Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) /2
Average Accounts Receivable = ($53,200 + $62,100) /2
Average Accounts Receivable = $57,650

Accounts Receivable Turnover = Sales / Average Accounts Receivable
Account Receivable Turnover = $467,518 / $57,650
Accounts Receivable Turnover = 8.11

Days Sales Uncollected = 365 days / Accounts Receivable Turnover
Days Sales Uncollected = 365 / 8.11
Days Sales Uncollected = 45.01 or 45 days

For 2017:

Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) /2
Average Accounts Receivable = ($62,100 + $89,000) /2
Average Accounts Receivable = $75,550

Accounts Receivable Turnover = Sales / Average Accounts Receivable
Account Receivable Turnover = $592,452 / $75,550
Accounts Receivable Turnover = 7.84

Days Sales Uncollected = 365 days / Accounts Receivable Turnover
Days Sales Uncollected = 365 / 7.84
Days Sales Uncollected = 46.56 or 47 days

Answer of Part 2:

For 2016:

Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) /2
Average Accounts Receivable = ($53,200 + $62,100) /2
Average Accounts Receivable = $57,650

Accounts Receivable Turnover = Sales / Average Accounts Receivable
Account Receivable Turnover = $467,518 / $57,650
Accounts Receivable Turnover = 8.11

For 2017:

Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) /2
Average Accounts Receivable = ($62,100 + $89,000) /2
Average Accounts Receivable = $75,550

Accounts Receivable Turnover = Sales / Average Accounts Receivable
Account Receivable Turnover = $592,452 / $75,550
Accounts Receivable Turnover = 7.84

Answer of Part 3:

For 2016:

Average Inventory = (Beginning Inventory + Ending Inventory) /2
Average Inventory = ($57,000 + $83,000) /2
Average Inventory = $70,000

Inventory Turnover = COGS / Average Inventory
Inventory Turnover = $303,887 / $70,000
Inventory turnover = 4.34 times

For 2017:

Average Inventory = (Beginning Inventory + Ending Inventory) /2
Average Inventory = ($83,000 + $114,500) /2
Average Inventory = $98,750

Inventory Turnover = COGS / Average Inventory
Inventory Turnover = $361,396 / $98,750
Inventory turnover = 3.66 times

Answer of Part 4:

For 2016:

Days Sales Inventory = 365 Days / Inventory Turnover
Days Sales Inventory = 365/ 4.34
Days Sales Inventory = 84.10 or 84 days

For 2017:

Days Sales Inventory = 365 days / Inventory Turnover
Days Sales Inventory = 365 / 3.66
Days Sales Inventory = 99.73 or 100 days