Total asset turnover: 1.5 Gross profit margin % (Sales-COGS/Sales) 25% Total lia
ID: 2624300 • Letter: T
Question
Total asset turnover: 1.5
Gross profit margin % (Sales-COGS/Sales) 25%
Total liabilities-to-assets ratio: 40%
Quick Ratio 0.80
Days Sales Outstanding (365-day year): 36.5
Inventory Turnover Ratio: 3.75
Partial Income Statement:
Sales ______________
COGS ______________
Balance Sheet:
Cash ______________ Accts Payable ___________
Accounts Receivable ______________ Long-Term Debt ___________
Inventories ______________ Common Stock ___________
Fixed Assets ______________ Ret. Earnings ___________
Total Assets $400,000 Total Liab/Equity ===========
Please explain each formula for the calculations
Explanation / Answer
The formula for Asset Turnover is Revenue / Total Assets.
Total Assets = $300,000. Since the Asset Turnover rate is 1.5, Revenue = ($300,000 X 1.5) $450,000
The formula for Debt Ratio is Total Liabilities / Total Assets.
Total Assets = $300,000. Since the Debt Ratio os 0.50, Total Liabilities = ($300,000 X .50) $150,000
Since Total Liabilities = $150,000 and the only two liability accounts are Accounts Payable (the balance of which is unknown) and Long Term Debt of $60,000, you can solve for Accounts Payable.
Accounts payable = ($150,000 - $60,000) $90,000
Days Sales Outstanding = 36.5 days. The formula for that is Accounts Receivable Balance / Sales X 365
Since DSO = 36.5, then Accounts Receivable = 10% of the Sales. 10% of $450,000 = $45,000
Gross Profit Margin is 25%. Therefore Costs of Goods Sold = (.75 X $450,000) $337,500
The formula for Quick Ratio = (Cash + Accounts Receivable) / Current Liabilities. Since the ratio = .80, you use this to calculate the total amount of cash and A/R. Since you've previously determined that current liabilities = $90,000, the total of cash and A/R = ($90,000 X .80) $72,000
Since you know that A/R = $45,000, then Cash = ($72,000 - $45,000) $27,000
The only kicker here is that the formula for Inventory Turnover is Costs of Goods Sold / Average Inventory. Since they don't tell us the figure for beginning inventory (so we can use this to calculate the ending inventory) we have to assume that we should just use ending inventory in the calculation. But see my last comment below also, since some books use a different formula for Inventory Turnover.
Since the Inventory Turnover Ratio is 5.0, the inventory balance = ($337,500 / 5) $67,500
Since you now have all of the other asset accounts identified, you can calculate the Fixed Asset balance. It is ($300,000 - $27,000, - $45,000 - $67,500) $169,500
Since Total Assets = $300,000 then Total Liabilities and Equity must also equal $300,000. Since you have now identified the balance of all the other liability and equity accounts, you can now calculate the balance of Common Stock. This number = ($300,000 - $150,000 - $97,500) $52,500
You have now filled in all the missing amounts. See my numbers shown below.
The only other issue here is that some books use a different formula for the inventory turnover ratio. Some use the formula of Sales / Inventory. You should check your book. If it uses this formula, then the Inventory Balance will be ($450,000 / 5) $90,000 instead of $67,500, and the Fixed Asset Balance will therefore be ($300,000 - $27,000 - $45,000 - $90,000) $138,000
Again, check your book to see how they calculate the Inventory Turnover Ratio
Here's the Balance Sheet with the missing numbers shown:
Cash $? $27,000
Accounts Receivables $? $45,000
Inventories $? $67,500 (or $90,000)
Fixed Assets $? $169,500 (or $138,000)
Total assets $300,000
Accounts Payable $? $90,000
Long-term debt $60,000
Total liabilities $? $150,000
Common stock $? $52,500
Retained earnings $97,500
Total Liabilities and Equity $300,000
Sales $? $450,000
Cost of goods sold $? $337,500