2. Computation and evaluation of activity ratios. The following data relate to A

Question

2. Computation and evaluation of activity ratios. The following data relate to Alaska Products, Inc: 19X5 19X4 Net credit sales $832,000 $760,000 Cost of goods sold 440,000 350,000 Cash, Dec. 31 125,000 110,000 Accounts receivable, Dec. 31 180,000 140,000 Inventory, Dec. 31 70,000 50,000 Accounts payable, Dec. 31 115,000 108,000 The company is planning to borrow $300,000 via a 90-day bank loan to cover short-term operating needs. a. Compute the accounts receivable and inventory turnover ratios for 19X5. Alaska rounds all calculations to two decimal places. b. Study the ratios from part (a) and comment on the company's ability to repay a bank loan in 90 days. c. Suppose that Alaska's major line of business involves the processing and distribution of fresh and frozen fish throughout the United States. Do you have any concerns about the company's inventory turnover ratio? Briefly discuss.

Explanation / Answer

Please find the answers as follows:

Part A:

A/R turnover ratio = Net Credit Sales/Average A/R = 832000/(180000+140000/2) = 3.328 or 3.33 times

Average Collection Period = 365/3.33 = 109.61 or 110 days.

Inventory Turnover Ratio = COGS/Average Inventory = 440000/(70000+50000/2) = 4.63 times

Part B

It takes company more than 90 days to collect money from its debtors.

Therefore, it may not be possible for the company to repay its debt on time.

Part C

Firm inventory turnover ratio is 4.63 times.

Company is required to study the industry average and decide accordingly on the suitability of its inventory turnover ratti.

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