28. The following information is available from Able, Inc. for the year 2011. Sa
ID: 2594373 • Letter: 2
Question
28. The following information is available from Able, Inc. for the year 2011. Sales (all on account) Cost of goods sold Accounts receivable Jan. 1 Accounts receivable Dec. 31 Inventory, Jan. 1 Inventory, Dec. 31 $790,000 $460,000 $ 70,000 66,000 45,000 35,000 Required: Calculate the following: a) Able's inventory turnover for 2011. b) The average number of days to sell inventory for the year. c) The receivable turnover. d) The average number of days to collect accounts receivable. e) Able's operating cycle. f) Able's cash flow from sales.Explanation / Answer
a) Average inventory = (Inventory, Dec. 31 + Inventory, Jan. 1) ÷ 2 = (35,000+45,000)÷2 = 80,000÷2 = $40,000
Inventory Turnover = Cost of goods sold ÷ Average inventory = 460,000÷40,000 = 11.5 times
b) Average number of days to sell inventory for the year = 365 ÷ Inventory Turnover = 365÷11.5 = 31.74 days = 32 days
c) Average accounts receivable = (Accounts receivable, Dec. 31 + Accounts receivable, Jan. 1) ÷ 2 = (66,000+70,000)÷2 = 136,000÷2 = $68,000
Receivable turnover = Sales ÷ Average accounts receivable = 790,000÷68,000 = 11.6 times
d) Average number of days to collect accounts receivable = 365 ÷ Receivable turnover = 365÷11.6 = 31.46 days = 31 days
e) Operating cycle = Average number of days to sell inventory for the year + Average number of days to collect accounts receivable = 32+31 = 63 days
f) Cash flow from sales = Accounts receivable, Jan. 1 + Sales - Accounts receivable, Dec. 31 = 70,000+790,000-66,000 = $794,000
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