Question

3. Elfco is in the business of making toys. A high percentage of its products are sold during November and December. Therefore, retailers need to have the toys in stock prior to November. The corporation produces on a relatively stable basis during the year in order to retain its skilled employees and minimize its investment in plant and equipment. The seasonal nature of its business requires a substantial capacity to store inventory.
The gross receivables balance at April 30, 2015, was $55,000, and the inventory balance was $250,000 on this date. Sales for the year ended April 30, 2016, totaled $5,000,000, and the cost of goods sold totaled $1,500,000.
Elfco uses a natural business year that ends on April 30. Inventory and accounts receivable data are given in the following table for the year ended April 30, 2016
Month	Gross Receivables	Inventory
May-15	$                    60,000	$        525,000
Jun-15	$                    40,000	$        650,000
Jul-15	$                    50,000	$        775,000
Aug-15	$                    60,000	$        900,000
Sep-15	$                  200,000	$        975,000
Oct-15	$                  800,000	$        700,000
Nov-15	$              1,500,000	$        400,000
Dec-15	$              1,800,000	$          25,000
Jan-16	$              1,000,000	$        100,000
Feb-16	$                  600,000	$        150,000
Mar-16	$                  200,000	$        275,000
Apr-16	$                    50,000	$        400,000
At April 30, 2015	$                    55,000	$        250,000
Sales, year end at April 30, 2016	$              5,000,000
Cost of Goods Sold	$              1,500,000
A. Using averages based on the year-end figures, compute the following:
1. Accounts receivable turnover in days
2. Accounts receivable turnover per year
3. Inventory turnover in days
4. Inventory turnover per year
B. Using averages based on monthly figures, compute the following:
1. Accounts receivable turnover in days
2. Accounts receivable turnover per year
3. Inventory turnover in days
4. Inventory turnover per year
C. Comment on the difference between the ratios computed in (a) and (b).		e.
D. Compute the days’ sales in receivables
E. Compute the days’ sales in inventory
F. How realistic are the days’ sales in receivables and the days’ sales in inventory that were com- puted in (d) and (e)?

Answer 1

A. Using averages based on year-end figures:

Accounts Receivable ratio refers to how efficiently a business can use its assets and how frequently it can collect cash from its receivables. It is calculated by dividing the credit sales by the average recivables.

Average Accounts Receivable = (Beginning Accounts Receivables + Ending Accounts Receivables) /2

Average Accounts Receivables = ($ 55,000 + $ 50,000)/2

Average Accounts Receivable = $ 52,500

Accounts Receivable turnover = Credit Sales / Average Accounts Receivable

Accounts Receivable turnover = $ 5,000,000 / $ 52,500

Accounts Receivable turnover = 95.2381 approx.

This means, this company can receive its average accounts receivable 95.2381 times in the year.

Accounts Receivable turnover in days = ( 365 days / 95.2381 times ) = 3.8325 days.

Therefore average account receivable can be recovered in a span of approximately 4 days.

Inventory turnover ratio refers to the number of times a company can sell its inventory. It is calculated by dividing the cost of goods sold by the average inventory.

Average inventory = (Beginning Inventory + Ending Inventory) /2

Average inventory = ($ 250,000 + $ 400,000)/2

Average Inventory = $ 325,000

Inventory Turnover Ratio = (Cost of Goods Sold)/ (Average Inventory)

Inventory Turnover = $ 1,500,000 / $ 325,000

Inventory Turnover = 4.6154approx.

This implies the company can sell its inventory 4.6154 times.

Inventory Turnover in days = (365 days/4.6154) = 79.0833days.

This implies, inventory can be changed for ever 79.0833 days by the company.

Therefore, the answers to the questions asked are as follows:

1. Accounts Receivable turnover in days is 3.8325 days

2. Accounts Receivable turnover per year is 95.2381 times

3. Inventory Turnover in days is 79.0833 days

4. Inventory Turnover per year is 4.6154 times

Hope it is helpful!!