Posted: February 26th, 2023

# Account question

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

And start your computation of EBI for 2017 with the \$1,205.4 figure.

Problem Statement:

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.

Problem Statement:

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

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

Problem Statement

Selected data of Islander Company follow:

As of December 31,
2022 2021
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,
2022 2021
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

Required:

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

Problem Statement:

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.

Problem Statement:

Required:

1. Which company is which? Explain how you identified each company from the data in the table.

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