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Double West Suppliers (DWS) reported sales for the year of $300,000, all on credit. The average gross profit percentage was 40 percent on sales. Account balances follow: Beginning Ending Accounts receivable (net) $ 45,000 $ 55,000 Inventory 60,000 40,000 Required: Compute the following turnover ratios. By dividing 365 by your ratios from requirement 1, calculate the average days to collect receivables and the average days to sell inventory.

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Answer:

(1) Account receivable turnover Ratio = 6 times

Inventory turnover Ratio = 3.6 times

(2) Average days to collect receivables = 61 days

Average days to collect inventory = 101 days

Explanation:

(1). Net credit sales = $300,000

Average account receivable = ($45,000 + $55,000) ÷ 2 = $50,000

COG sold = $300,000 - (40% × $300,000) = $180,000

Average inventory = (60,000 + 40,000) ÷ 2 = 50,000

Account receivable turnover Ratio= Net Credit Sales ÷ Average Accounts receivable

= $300,000 ÷ 50,000

= 6 times

Inventory turnover Ratio= COG Sold ÷ Average Inventory

= 180,000 ÷ 50,000

= 3.6 times

(2). Average days to collect receivables= 365 ÷ 6

= 60.83 or 61 days

Average days to collect inventory= 365 ÷ 3.6

= 101.38 or 101 days

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