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How to Calculate Selected Liquidity & Profitability Ratios

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Selected balances from a company's financial statements are shown below. Calculate the following ratios for 2012:

(a) accounts receivable turnover
(b) inventory turnover
(c) days' sales uncollected
(d) days' sales in inventory
(e) profit margin.
(f) return on total assets

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Solution Summary

This solution shows how to calculate the following ratios using selected balances from financial statements: accounts receivable turnover, inventory turnover, days' sales uncollected, days' sales in inventory, profit margin, and return on total assets. Also included is a short description of what each ratio calculation measures to better understand the meaning of the calculation results.

This problem provides students with a clear understanding of the concept of liquidity and profitability ratios using a detail step-by-step explanation of each.

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The attached MS Word document will also show the problem, calculations as well as a detail explanation of the meaning of each ratio calculation results.

(a) Accounts receivable turnover

Accounts Receivable Turnover = Net Sales on Account/Average Accounts Receivable
Measures how often the sales cycle occurs during the year. Assesses the efficiency in collecting receivables and in the management of credit.

312,000 / (24,000 + 27,000 / 2) = 12.2 Times

(b) Inventory turnover

Inventory Turnover = Cost of Goods Sold/Average Merchandise Inventory
Measures how many times the company sold through its inventory this year. This ...

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