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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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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 ...

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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