Kimmel, Financial Accounting,,cust oeiit Help l (e) Ratio Analysis Zipper Corpor
ID: 2509035 • Letter: K
Question
Kimmel, Financial Accounting,,cust oeiit Help l (e) Ratio Analysis Zipper Corporation reported the following condensed income statement for 2015 Sales Cost of goods sold Gross profit Less expenses Net income before taxes Less income taxes Net income after taxes $6,000,000 4,200,000 $1,800,000 -1,500,000 $300,000 120,000 $180,000 Assume the following Average inventory Average accounts receivable Average accounts payable $700,000 $1,200,000 $300,000 (Use 365 days a year) Compute the following: (Round answers to 2 decimal places, e.g.52.75.) Inventory turnover Accounts receivable turnover Average number of days to sell an iten Average number of days to collect an account receivable times times days days F3 F6 F8Explanation / Answer
Inventory turnover is an efficiency ratio which calculates the number of times per period a business sells and replaces its entire batch of inventories. It is the ratio of cost of goods sold by a business during an accounting period to the average inventories of the business during the period.
Inventory turnover ratio = Cogs/ average inventory
= 4200000/ 700000
= 6
Inventory turnover ratio is 6 times
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A/R turn over = Credit sales/ average inventory
= 6000000/ 700000
= 8.57 times
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Days' inventory on hand is an accounting ratio which measures the number of days a company takes to sell its average balance of inventory. It is also an estimate of the number of days for which the average balance of inventory will be sufficient.
DIO = (Average inventory/Cost of googs sold)* 365
Inventory = 700000
Cogs = 4200000
Lets put the values in the formula to calculate DIO
DIO = (700000/ 4200000) *365
= 0.1667* 365
= 60.85
So average number of days company takes to sale its inventory is 61 days
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Average collection period = 365/ AR turn over
= 365/ 8.57
= 52.59
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