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

Question

Computation and evaluation of activity ratios. The following data relate to Alaska Products. Inc: The company is planning to borrow $300,000 via a 90-day bank loan to cover short-term operating needs. Compute the accounts receivable and inventory turnover ratios for 19X5. Alaska rounds all calculations to two decimal places. Study the ratios From part (a) and comment on the company's ability to repay a bank loan in 90 days. 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.

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