Question

Exercise 12-80
Asset Efficiency Ratios

Financial statements for Steele Inc. follow.

Steele Inc.
Consolidated Income Statements
(in thousands except per share amounts)
		2019		2018		2017
Net sales		$7,245,088		$6,944,296		$6,149,218
Cost of goods sold		(5,286,253)		(4,953,556)		(4,355,675)
Gross margin		$1,958,835		$1,990,740		$1,793,543
General and administrative expenses		(1,259,896)		(1,202,042)		(1,080,843)
Special and nonrecurring items		2,617		0		0
Operating income		$701,556		$788,698		$712,700
Interest expense		(63,685)		(62,398)		(63,927)
Other income		7,308		10,080		11,529
Gain on sale of investments		0		9,117		0
Income before income taxes		$645,179		$745,497		$660,302
Provision for income taxes		(254,000)		(290,000)		(257,000)
Net income		$391,179		$455,497		$403,302

Steele Inc.
Consolidated Balance Sheets
(in thousands)
ASSETS		Dec. 31, 2019		Dec. 31, 2018
Current assets:
Cash and equivalents		$320,558		$41,235
Accounts receivable		1,056,911		837,377
Inventories		733,700		803,707
Other		109,456		101,811
Total current assets		$2,220,625		$1,784,130
Property and equipment, net		1,666,588		1,813,948
Other assets		247,892		248,372
Total assets		$4,135,105		$3,846,450
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$250,363		$309,092
Accrued expenses		347,892		274,220
Other current liabilities		15,700		0
Income taxes		93,489		137,466
Total current liabilities		$707,444		$720,778
Long-term debt		650,000		541,639
Deferred income taxes		275,101		274,844
Other long-term liabilities		61,267		41,572
Total liabilities		1,693,812		1,578,833
Stockholders’ equity:
Preferred stock		$100,000		$100,000
Common stock		89,727		89,727
Additional paid-in capital—common stock		128,906		127,776
Retained earnings		2,397,112		2,136,794
		$2,715,745		$2,454,297
Less: Treasury stock, at cost		(274,452)		(186,680)
Total stockholders’ equity		$2,441,293		$2,267,617
Total liabilities and stockholders’ equity		$4,135,105		$3,846,450

Use the information provided above and below to respond to the following requirements.

Statement Item	January 1, 2018 (in thousands)
Accounts receivable	$752,945
Inventories	698,604
Total assets	3,485,233

Required:

2. Indicate the length of Steele's operating cycle in days for the years ended December 31, 2019, and December 31, 2018. Round intermediate calculations and final answers to two decimal places.

2019
2018

Answer 1

Answer :

Operating cycle = Inventory period + Accounts receivable period

Year 2019

Inventory period = 365 days / Inventory turnover ratio

Inventory turnover ratio = Cost of goods sold / Average inventory

Average inventory = ($803,707 + $733,700) / 2 = $768,703.5

Inventory turnover ratio

= $5,286,253 / $768,703.5

= 6.88 times

Inventory period

= 365 days / 6.88 times

= 53.05 days

Accounts receivable period = 365 days/ Accounts receivables turnover ratio

Accounts receivables turnover ratio = Credit sales / Average accounts receivable

Average accounts receivable = ($1,056,911 + $837,377) / 2 = $947,144

Accounts receivables turnover ratio

= $7,245,088 / $947,144 [assumed that all sales are on credit]

= 7.65 times

Accounts receivable period

= 365 days / 7.65 times

= 47.71 days

Operating cycle = = Inventory period + Accounts receivable period

= 53.05 days + 47.71 days

= 100.76 days

Year 2018

Inventory period = 365 days / Inventory turnover ratio

Inventory turnover ratio = Cost of goods sold / Average inventory

Average inventory = ($803,707 + $698,604) / 2 = $751,155.5

Inventory turnover ratio

= $4,953,556 / $751,155.5

= 6.59 times

Inventory period

= 365 days / 6.59 times

= 55.39 days

Accounts receivable period = 365 days/ Accounts receivables turnover ratio

Accounts receivables turnover ratio = Credit sales / Average accounts receivable

Average accounts receivable = ($752,945 + $837,377) / 2 = $795,161

Accounts receivables turnover ratio

= $6,944,296 / $795,161 [assumed that all sales are on credit]

= 8.73 times

Accounts receivable period

= 365 days / 8.73 times

= 41.81 days

Operating cycle = = Inventory period + Accounts receivable period

= 55.39 days + 41.81 days

= 97.20 days