ACCT1101 Lecture Notes - Lecture 15: Asset, Inventory Turnover, Basionym

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6 Sep 2018

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Department

Accounting

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ACCT1101

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All

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In both the cunningham text and the vbe, income tax is assumed to be zero. In reality we would use net income before tax in the calculation of both 1. and 2. I(cid:374) a(cid:271)solute te(cid:396)(cid:373)s, pa(cid:373)(cid:859)s pa(cid:396)t(cid:455) shop pt(cid:455) ltd has generated a satisfactory return in 2013: but we would benchmark this against budgeted profit and also similar businesses in the industry. Days in selling period = number of days in business year/ inventory turnover. Ac receivable turnover = net credit sales/average ac receivable. Days in collection period = number of days in business year/ ac receivable turnover. = 32. 76 days: pa(cid:373)(cid:859)s pa(cid:396)t(cid:455) shop pt(cid:455) ltd tu(cid:396)(cid:374)s o(cid:448)e(cid:396) its i(cid:374)(cid:448)e(cid:374)to(cid:396)(cid:455) app(cid:396)o(cid:454)i(cid:373)atel(cid:455) e(cid:448)e(cid:396)(cid:455) (cid:1007)(cid:1007) da(cid:455)s. is this reasonable given the nature of the business, collection time for accounts receivable is approximately 33 days. We would compare this to the credit terms of the business to evaluate how efficiently the business is collecting its receivables: both ratios linked to liquidity.

Related Questions

Ratio Analysis

The comparative statements offinancial position of IKEA Furniture Outlay Retail Shop in Sydneyfor the current year and previous year are given below. Calculatethe ratios necessary to evaluate the shopâs performance

IKEA Furniture Outlay Profit & Loss Statement

For the year ended30^th June 2012 & 2013

	2012	2013
Sales( all credit)	220 000	250 000
Less Cost of Sales:	76 500	124 000
Opening Inventory	65 000	85 000
Purchases	99 500	144 000
Goods available for sale	164 500	229 000
Closing Inventory	(88 000) 76 500	(105 000) 124 000
Gross Profit	143 500	126 000
Operating Expenses	39 700	71 060
Net Profit	103 800	54 940

IKEA Furniture OutlayBalance Sheet as at 30^th June2012/2013

	2012	2013
Assets:
Current Assets:
Cash	75 700	87 000
Accounts Receivable	69 000	68 500
Inventory	88 000	105 000
Total CurrentAssets	232 700	260 500
Non-CurrentAssets:
Plant and Equipment	295 000	208 500
Total Assets:	527 700	469 000
Liabilities

CurrentLiabilities
Accounts Payable	51 500	59 950
Bank overdraft	15 200	20 500
Total CurrentLiabilities	66 700	80 450
NoncurrentLiabilities:
6.5% Bank Loan	333 000	243 070
Total non-currentliabilities:	333 000	243 070
Totalliabilities	399 700	323 520
Ownerâs Equity
Ordinary shares of $2 each	95 000	100 100
Retained profit	33 000	45 380
Total OwnerâsEquity	128 000	145 480

Required:

Prepare Ratio Analysis based on the formula distributed toyou

Make comments about how to improve the business performance.

Note:

All sales are on credit. Accounts receivable balance on1/07/2011 was $66 800 and Business works 5 days a week.

Retained Profit = Net Profit â Dividend paid

Formula:

Current ratio = Current assets/Currentliabilities

Liquid ratio = Current assets âInventory (Closing Stocks)/Current liabilities â Bank overdraft

Gross profit ratio = Grossprofit/Sales

Net profit ratio = Net profit aftertax/Sales

Accounts receivable rate = Creditsales/Average accounts receivable Collection days = 365 days /Accounts receivable rate

Return on equity = Net profit aftertax/Owners equity Debt to Equity = Total debt/Equity

Total asset turnover = Totalsales/Total assets

Return on investment (ROI) = Netprofit after tax/Total assets Inventory turnover = Cost of Goodssold/Average Inventories Times Interest cover = Net Profit beforeInterest & tax / Interest

Earnings per share = (Net profitbefore tax â Preference Dividend) / Number of Ordinary shares

Ratio(Formula)	2012	2013	Interpretation

Ratio(Formula)	2012	2013	Interpretation

Ratio(Formula)	2012	2013	Interpretation

Ratio(Formula)	2012	2013	Interpretation

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Write an assessment of the company's financial performance,using ratios to support your conclusion. What can you concludeabout the company's liquidity, solvency, and profitability? Be sureto include the ratios calculation to support your conclusion.

Use the financial statements provided below to calculate thefollowing financial ratios:

	2012	2011
1. Current Ratio	10.915	6.715
2. Quick Ratio	11.307	7.524
3. Long-Term Debt-to-Equity Ratio	2.785	3.834
4. Debt-to-Equity Ratio	2.785	3.834
5. Long-Term Debt Ratio	2.866	3.988
6. Accounts Receivable Turnover Ratio (Assume that60% of Sales are Credit	25.491	8.908
7. Inventory Turnover Ratio (Assume 2011 beginninginventory was -0-.)	-0.715	-0.450
8. Asset Turnover Ratio	0.163	0.076
9. Gross Profit Percentage	0.731	0.806
10. Net Profit Margin Percentage	0.375	0.311
11. Return on Assets	0.061	0.024
12. Return on Equity	0.237	0.118

Get Your Motor Runnin'

Compartive Balance Sheets

	2012	2011
Assets
Current Assets
Cash	$198,456	$147,333
Accounts Receivable	4,000	5,000
Allowance for Uncollectible Accounts	(250)	80
Supplies	200	250
Inventory	35,000	32,000
Total current assets	237,406	184,663
Property, Plant, and Equipment
Equipment	60,000	15,000
Accumulated Depreciation - Equipment	(14,000)	(1,000)
Vehicles	35,000	35,000
Accumulated Depreciation - Vehicles	(4,800)	(2,400)
Building	684,375	684,375
Accumulated Depreciation - Building	(25,000)	(12,500)
Land	46,875	46,875
Land Improvements	23,750	23,750
Accumulated Depreciation - Land Improvements	(2,539)	(663)
Total PP&E	803,661	788,437
Total Assets	$1,041,067	$973,100

Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable	$20,000	$24,000
Wages Payable	1,000	500
Warranties Payable	750	500
Notes Payable	0	2,500
Total current liabilities	21,750	27,500
Long-term Liabilities
Bonds Payable	750,000	450,000
Mortgage Payable	0	300,000
Total long-term liabilities	750,00	750,000
Total liabilities	771,750	777,500
Stockholder's Equity
Common Stock	125,000	125,000
Paid-in capital in excess of par - common	25,000	25,000
Preferred Stock	40,000	20,000
Paid-in capital in excess of par - preferred	25,000	15,000
Less: Treasury Stock	(3,000)	(3,000)
Paid-in capital - treasury stock	500	500
Retained Earnings	56,817	13,100
Total stockholders' equity	269,317	195,600
Total liabilities and stockholders' equity	$1,041,067	$973,100

Get Your Motor Runnin'

Comparative Income Statements

	2012	2011
Service Revenue	$93,693	$50,230
Sales	76,250	24,000
Cost of Goods Sold	(45,750)	(14,400)
Gross Margin	$124,193	$59,830

Operating Expenses:
Advertising Expense	$7,500	$5,000
Bad Debt Expense	330	0
Depreciation Expense - Equipment	13,000	5,667
Depreciation Expense - Vehicles	2,400	2,400
Depreciation Expense - Building	12,500	12,500
Depreciation Expense - Land Improvements	1,876	663
Wages Expense	22,870	10,500
Total Expenses	60,476	36,730
Net Income	$63,717	$23,100

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Part A - Inventory and Depreciation

Consider this Balance Sheet situation:

Three years ago Mr. Jones bought a new machine that insertspimentos into

green olives. He paid $10,000 for the machine, and it wenthappily to work

and has been filling 5,000 green olives per day with bright redpimentos.

At the time of purchase, Mr. Jonesï¿½ accountant told him that thestandard

useful life for this type of equipment was 10 years. Mr. Jonesdecided to use

the straight-line method to calculate depreciation.

Please answer the following questions:

1. What amount would go on the Balance Sheet at the time of

purchase?

2. Where would this amount have been posted on the Balance

Sheet?

3. What is the current book value of the equipment?

4. How much accumulated depreciation is posted?

Consider this Income Statement situation:

Mr. Jones started the year with no olives in inventory. Hebought 5,000

green olives at 25 cents each in March, 10,000 at 50 cents eachin July, and

10,000 at 75 cents each in November. At year end he had 2,000olives left

in inventory.

Calculate his ending inventory value using:

5. Average cost method

6. FIFO

7. LIFO

8. Which method should he use when he prepares his Income

Statement to show the bank?

Part B - Financial Statement Analysis

Please solve the following Financial Statement Ratios using

the Balance Sheet and Income Statement found below.

Also tell me, in a sentence or two, what we have learned

from each one.

1. CURRENT RATIO

2. QUICK, OR ACID TEST RATIO

3. WORKING CAPITAL

4. DEBT TO WORTH (or Owners Equity) RATIO

5. ROI (Return on Investment).

6. EARNINGS PER SHARE

7. INVENTORY TURNOVER

FIGURE A

Jim Jones, dba Jimï¿½s Cool Stuff

BALANCE SHEET

As of December 31, 2009

ASSETS LIABILITIES

Current Assets Current Liabilities

Cash 250 Accounts Payable 500

Accts. Receivable 550 Notes Payable 600

Inventory 750 Contracts Payable 300

Prepaid Expenses 1,000 Total Curr. Liabilities 1,100

Total Curr. Assets 2,550

Long-Term Liabilities

Fixed Assets Mortgage 15,000

Land 40,000 Long Term Contract 1,500

Truck 2,000 Total LT Liabilities 16,500

Accum. Dep. (250) 1,750 TOTAL LIABILITIES 17,600

Total Fixed Assets 41,750

TOTAL ASSETS: 44,300 EQUITY

Common Stock

(1,000 shares)

26,700

TOTAL EQUITY 26,700

LIABILITIES & EQUITY 44,300

FIGURE B

Jim Jones, dba Jimï¿½s Cool Stuff

INCOME STATEMENT

For the 12 months ending December 31, 2009

REVENUE $1,000,000

EXPENSES

Cost of Goods Sold:

Beginning Inventory 125,000

Plus Purchases 550,000

Less Ending Inventory (100,000)

= Cost of Goods Sold $575,000

Gross Profit $425,000

Operating Expenses

Rent 175,000

Payroll 217,700

Utilities 11,000

Office Expenses 500

Depreciation 50

Local Taxes 250

Legal Fees 500

Total Operating Expenses 405,000

NET INCOME BEFORE TAX 20,000

Federal Income Taxes (25%) 5,000

NET INCOME 15,000

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ACCT1101 Lecture Notes - Lecture 15: Asset, Inventory Turnover, Basionym

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