Ampersand & Gravel is a construction company. The company\'s income statement or

Question

Ampersand & Gravel is a construction company. The company's income statement or the 2018 fiscal year included the following information ($ in millions)

Sales $6,255

Cost of Goods Sold $5,190

The company's balance sheet for 2018 and 2017 included the folowing information ($ in millions)

AR net 2018 $703 2017 $583

Inventories 2018 $880 2017 $808

The statement of cash fllows reported bad debt expense for 2018 of $8 million. The summary of significant accounting policies included the following notes:

AR (in part)

The allowance for uncollectible accounts was $10 and $7 at December 31,2018 and 2017, respectively. All sales were on credit.

Inventories

Inventories are valued at the lower of cost or market. The cost of the majority of inventories is measured usint the LIFO method. Other inventories are measured principally at average cost and consist mostly of foreign inventory and certain raw materials. if the entire inventory had been valued on an average cost basis, inventory would have been higher by $480 and $350 at the end of 2018 and 2017 respectively.

During 2018, 2017, and 2016 liquidation of LIFO layers generated income of $6, $7 and $25 respectively.

Using the information provided:

1. Determine the amount of AR written offf during 2018

2. Calculate the amount of cash collected from customers during 2018.

3. Calculate what cost of goods sold would have been for 2018 if the company had used average cost to value its entire inventory.

4. Calculate the following ratios for 2018.

a. Receivables turnover ratio

b. Inventory turnover ratio

c. Gross profit ratio

Explanation / Answer

Solution:

1. Allowance for uncollectible accounts

Balance, beginning of year $ 7

Add:  Bad debt expense 8

Deduct:  Balance, end of year (10)

Accounts receivable written off $ 5

2.

Balance, beginning of year ($583 + $7) $ 590

Add:  Credit sales 6,255

Deduct:  Writeoffs (5)

Deduct:  Balance, end of year ($703 + $10) (713)

Cash collections $6,127

3.

Cost of goods sold as given $5,190

Add:  Increase in beginning inventory per note 350

Deduct:  Increase in ending inventory, per note (480)

Cost of goods sold under average cost $5,060

4.

a) Receivablesturnover = Net sales ÷ Average Accounts Receivable Receivables turnover

= $6,255 ÷ ($703 + 583)/2

= 9.73 times

b) Inventory turnover = Cost of goods sold ÷ Average inventory Inventory turnover

= $5,190 ÷ ($880 + $808)/2

= 6.15 times

c) Gross profit ratio = Gross profit ÷ Sales Gross profit ratio

= ($6,255 $5,190) ÷ $6,255

= 17%

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