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# Average collection period and Current ratio

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On average, Microlimp's accounts receivables total \$3,000,000 on annual sales of \$400,000,000.

What is Microlimp's average collection period?

How would the following actions affect a firm's current ratio?

a. Inventory is purchased and paid for with cash, it is not purchased on account.

b. The firm takes out a short term bank loan to pay its overdue accounts payable.

c. A customer prepays in full for specially ordered merchandise that it will take 60 days to manufacture.

d. Inventory is sold at the firm's normal 35% markup over cost.

#### Solution Preview

Here is some background info for you on avg collection period and current ratio:

Avg collection period: The average time period for which receivables are outstanding. Equal to accounts receivable divided by average daily sales.

The average collection period measures the length of time it takes to convert your average sales into cash. This measurement defines the relationship between accounts receivable and your cash flow. A longer average collection period requires a higher investment in accounts receivable. A higher investment in accounts receivable means less cash is available to cover cash outflows, such as paying bills.

The average collection period is calculated by dividing your present accounts receivable balance by your average daily sales:

Formula: Current AR / Avg Daily Sales
Avg Daily Sales: Annual Sales / 365

source: http://www.toolkit.cch.com/text/P06_4208.asp

For the purposes of your ...

#### Solution Summary

The solution discusses average collection periods and current ratios of costs.

\$2.19

## Corporate Finance : Liquidity Ratio, Collection Period, Inventory Turnover, Leverage Ratios, Du Pont Identity, Payables and Market Value

ASee attached file for full problem description.

I am needing help answering the circled questions:

1-10 and 13

1, Calculating Liquidity Ratios. SDJ, Inca, has net working capital of \$900, current liabilities of \$4,320, and inventory of \$ 1 ,900. What is the current ratio? What is the quick ratio?
2. Calculating Profitability Ratios. Bennett's Bird Cages has sales of \$41 million, total assets of \$32 million, and total debt of \$11 million. If the profit margin is 12 percent, what is net income? What is ROA? What is ROE?
3. Calculating the Average Collection Period. Pirate Lumber Yard has a current accounts receivable balance of \$308, 165. Credit sales for the year just ended were \$2, I 3 1 ,5 1 6. What is the receivables turnover? The days' sales in receivables? How long did it take on average for credit customers to pay off their accounts during the past year?
4. Calculating Inventory Turnover. Keegan Corporation has ending inventory of \$921,386, and cost of goods sold for the year just ended was \$1,843,127. What is the inventory turnover? The days' sales in inventory? How long on average did a unit of inventory sit on the shelf before it was sold?
5 Calculating Leverage Ratios. Myrtle Golf, Inc., has a total debt ratio of 45. What
is its debt-equity ratio? What is its equity multiplier?
retained earnings for the year just ended of \$300,000. The firm paid out \$220,000 in
cash dividends, and it has ending total equity of \$5 million. If Sandy's currently has
300,000 shares of common stock outstanding, what are earnings per share?
Dividends per share? What is book value per share? If the stock currently sells for
\$25 per share, what is the market-tobook ratio? The priceeearnings ratio?
7. Du Pont Identity. If Roten Rooters, Inc., has an equity multiplier of 1 .60, total asset turnover of 1.05, and a profit margin of 1.1 percent, what is its ROE?
8. Du Pont Identity. Jimmy Cricket Removal has a profit margin of 12 percent, total asset turnover of 1.35, and ROE of 17.20 percent1 What is this firm's debt-equity ratio?
9, Calculating Average Payables Period. For the past year, BDJ, Inc., had a cost of goods sold of \$18,364. At the end of the year, the accounts payable balance was \$3,105 . How long on average did it take the company to pay off its suppliers during the year? What might a large value for this ratio imply?
10. Equity Multiplier and Return on Equity. Sunny Beach Chair Company has a debt-equity ratio of .80. Return on assets is 8.4 percent, and total equity is \$430,000. What is the equity multiplier? Return on equity? Net income?
13. Sustainable Growth. Based on the following information, calculate the sustainable growth rate for Chicago Chocolate Pies:

Please see the attached file for the fully formatted problems.

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