answer the following questions related to investments in inventory and accounts

Question

answer the following questions related to investments in inventory and accounts receivable:

1.How is inventory turnover calculated?
2.Explain how inventory turnover affects the amount of cash that must be invested in inventory.
3.How is accounts receivable turnover calculated?
4.Explain how accounts receivable turnover affects the amount of cash that must be invested in accounts receivable.
5.Assuming that a company has $365 million in annual sales, and a gross margin of 20%, how much investment will each additional day of sales in inventory require?
6.Assuming that a company has $365 million in annual sales, and a gross margin of 20%, how much investment will each additional day of sales in accounts receivable require?

Explanation / Answer

1. Finding out how fast a company turns its inventory is simple. Here's the formula. Calculating Inventory Turns / Inventory Turnover Ratio Cost of Goods Sold^1 ÷ Average Inventory for the Period^2 2. By maintaining accounts receivable, firms are indirectly extending interest-free loans to their clients. A high ratio implies either that a company operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient. A low ratio implies the company should re-assess its credit policies in order to ensure the timely collection of imparted credit that is not earning interest for the firm. 3. Accounts receivable turnover ratio = Net Credit Sales / Average Accounts Receivable 4. Here's how it works: Let's say Wal-Mart wants to order a new DVD which is being released by Warner Brothers. Wal-Mart orders 500,000 copies for its stores. Warner Brothers receives the order, and within a week, ships the DVDs to one of Wal-Mart's warehouses. Included in the shipment is a bill (let's say WB charged Wal-Mart $5 per DVD for half a million copies - that's $2.5 million). Warner Brothers has already sent the movies to Wal-Mart, even though Wal-Mart hasn't paid a penny. In essence, Wal-Mart is buying on credit and promising to pay WB's the $2.5 million. 5. Gross margin percentage = gross profit/sales gross margin of 20%,= gross profit/ $365 million gross profit =$365 million x 20%=73 millions goods sold(cost)=sale- gross profit =$365-73=292 The investment needed for per day 292/365days = 0.8 million Answer: 0.8 million 6. 0.36 million

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