Posted: February 26th, 2023
Make the computations that the problem asks for. When the problem asks you to adjust the net income for the Tax
Cuts and Jobs Act of 2017, the problem is asking you to use net income for 2017 like this:
2017 Net Income $1,380.6
2017 Adjusted Net Income $1,205.4
And start your computation of EBI for 2017 with the $1,205.4 figure.
This is an opportunity to work with Accounts Receivable Turnover and, for future reference, Days in Receivables.
Accounts receivable Turnover = Net Credit Sales / Average Accounts receivable
Days Accounts receivable outstanding = Days in receivables = 365 / Accounts receivable Turnover
Some problems will separate out net credit sales. Some problems will not. You always go with the information given. If
the problem does not separate the sales into credit and cash, then include all of the sales as credit. In a sense, the
resulting average will be a little low because the cash sales are instant collections.
This is an opportunity to work with Accounts Receivable, Inventory, and Accounts Payable. These
notions are from about pages 194 to 197. With any problem statement we operate with whatever data
is given. While the ideal would be that sales is subdivided between credit sales and cash sales, like in
this problem, if we only have total sales, then we use total sales in the accounts receivable turnover.
Also, feel free to use years of 360 rather than 365. That should never make a difference in the right-ness
or wrong-ness of your response.
Accounts Receivable Turnover = Net credit sales / Average accounts receivable
Days Accounts Receivable outstanding = 365 / Accounts Receivable Turnover
Inventory Turnover = Cost of goods sold / Average inventory
Days Inventory held = 365 / Inventory Turnover
Accounts Payable Turnover = Inventory Purchases / Average accounts payable
Days Accounts Payable outstanding = 365 / Accounts payable turnover
Operating cycle = Days in receivables + Days in inventory
You can see that the operating cycle is the time from purchase of inventory from the vendor to
collection of cash from the customer.
Cash conversion cycle = operating cycle – days accounts payable outstanding
Selected data of Islander Company follow:
As of December 31,
Accounts receivable $500,000 $470,000
Allowance for doubtful accounts
Net accounts receivable $475,000 $450,000
Inventories – lower of cost or market $600,000 $550,000
Accounts payable $400,000 $360,000
Year Ended December 31,
Net credit sales $2,500,000 $2,200,000
Net cash sales 500,000 400,000
Net sales $3,000,000 $2,600,000
Cost of goods sold $2,200,000 $1,800,000
Selling, general, and administrative expenses 300,000 270,000
Other 50,000 30,000
Total operating expenses $2,350,000 $2,100,000
1. What is the Accounts Receivable Turnover?
2. What is the Days Accounts Receivable Outstanding?
3. What is the Inventory Turnover?
4. What is the Days Inventory held?
5. What is the Accounts Payable Turnover?
6. What is the Days Accounts Payable Outstanding?
7. What is the Operating Cycle?
8. What is the Cash Conversion Cycle?
This is an opportunity to work with Inventory Turnover and, for future reference, Days in Inventory.
Inventory Turnover = Cost of Goods Sold / Average Inventory
Days in Inventory = Days Inventory Held = 365 / Inventory Turnover
This is an opportunity to make inferences about business models from the accounting reports. Accounting
should tell the story of the organization. Retail companies should have proportions in the balance sheet that
reflect their business model of being a retail company. Utility companies should have proportions in the
balance sheet that reflect their business model of being a utility company.
Working backwards in this problem, the ratios should suggest the business of the organization. For example:
• Utility companies have a high investments in assets.
• Inventory turns over faster than equipment, so a retail company’s asset turnover tends to be higher.
1. Which company is which? Explain how you identified each company from the data in the table.
Place an order in 3 easy steps. Takes less than 5 mins.