Question

​(Evaluating liquidity​) The Tabor Sales Company had a gross profit margin​ (gross profits divided by ÷​sales) of 30.4 percent and sales of ​$9.2 million last year.​ Seventy-five percent of the​firm's sales are on credit and the remainder are cash sales.​Tabor's current assets equal ​$2.1 ​million, its current liabilities equal ​$319,000​, and it has ​$99,000 in cash plus marketable securities.

a. If​ Tabor's accounts receivable are ​$562,500​, what is its average collection​ period?

b. If Tabor reduces its average collection period to 19 ​days, what will be its new level of accounts​ receivable?

c. ​Tabor's inventory turnover ratio is 9.5 times. What is the level of​ Tabor's inventories?

Answer 1

Answer:

Explanation:

Credit sales = 75% * $9.2 million =$6.9m

(a) Average collection period = (Accounts receivables/Credit sales) * 365 days

                                                = (562,500/6,900,000) * 365

                                                =29.76 days

                                           ≅   30 days

(b) New level of accounts receivables after reducing collection period to 19 days

= (19/365 ) * 6,900,000

= $359,178

(c) Gross profit = 30.4% * ​$9.2 million

                         = $2,796,800

Cost of Sales = $ 9,200,000- $2,796,800

                      = $6,403,200

Inventory Turnover ratio = Cost of goods sold/Average stock

Hence, Inventories level (i.e Average stock) = 6,403,200/9.5

                         =$674,021