Session 8 – Exercises – Efficiency Ratios

6.4 Attril & McLaney

Threads Limited manufactures nuts and bolts, which are sold to industrial users. The
abbreviated financial statements for each of the last two years are as follows:

Income statements for the year ended 31 December

Year before last
Last year
£000
£000
1,200
Revenue 1,180
(750)
Cost of sales (680)
450
Gross profit 500
(208)
Operating expenses (200)
(75)
Depreciation (66)
167
Operating profit 234
(8)
Interest (–)
159
Profit before taxation 234
(48)
Taxation (80)
111
Profit for the year 154

Statements of financial position as at 31 December

Year before last Last year
£000 £000
ASSETS
Non-current assets
Property, plant and equipment 702 687
Current assets
Inventories 148 236
Trade receivables 102 156
Cash 3 4
253 396
Total assets 955 1,083
EQUITY AND LIABILITIES
Equity
Ordinary share capital (£1 shares, fully paid) 500 500
Retained earnings 256 295
756 795
Non-current liabilities
Borrowings – Bank loan – 50
Current liabilities
Trade payables 60 76
Other payables and accruals 18 16
Taxation 40 24
Taxation 40 24
Short-term borrowings (all bank overdraft) 81 122
199 238
Total equity and liabilities 955 1,083

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Session 8 – Exercises – Efficiency Ratios

Dividends were paid on ordinary shares of £70,000 and £72,000 in respect of the year
before last and last year, respectively.
Required:
(a) Calculate the following financial ratios for both years (using year-end figures for
statement of financial position items):
■ settlement period for trade receivables
■ settlement period for trade payables
■ inventories turnover period.
(b) Calculate the cash conversion cycle (working capital cycle)? Comment on the result?

E14-51 Inventory Ratios Stice&Stice

The following data are available for 2012, regarding the inventory of two companies.

Atkins Computers Burbank Electronics

Beginning inventory . . . . . . . . . . . . . . . . . $ 50,000 $ 100,000

Ending inventory . . . . . . . . . . . . . . . . . . . . . 60,000 115,000
Cost of goods sold . . . . . . . . . . .. . . . . . . . . 750,000 1,000,000
Compute inventory turnover (round to the nearest hundredth) and number of days’ sales in
inventory (round to the nearest tenth) for both companies. Which company is managing its
inventory more efficiently.

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Session 8 – Exercises – Efficiency Ratios

E19-3Hansen&Mowen

The following selected information is taken form the financial statements of Riflen Company
for its most recent years of operations:

Beginning balance:
Inventory $200,000
Accounts receivable 300,000
Ending balance:
Inventory $250,000
Accounts receivable 400,000
During the year, Riflen Company had net sales of $2.45 million. The cost of goods sold was
$1.3 million. Required:

1. Compute the following ratios:

a. Days receivables outstanding.
b. Days inventory outstanding.
2. Assume that the lower quartile, median, and upper quartile for Riflen’s industry are
as follows for the ratios computed in requirement 1:

Days receivables outstanding: 69 49 33

Days inventory outstanding: 99 59 37
Assess the performance of Riflen relative to its industry.

Sellograph Corporation reports sales of $10M for Year 2, with a gross profit margin of 40%. 20% of
Sellograph's sales are on credit.

Year 1 Year 2
Account receivable $150,000 $170,000
Inventory 900,000 1,000,000
Accounts payable 1,100,000 1,200,000

15. Accounts receivable days outstanding of Year 2 is closest to:

A. 30.6 days
B. 28.8 days
C. 27.0 days
D. 6.1 days

16. Accounts payable days outstanding of Year 2 is closest to:

A. 57.0 days
B. 69.0 days
C. 72.0 days
D. 43.2 days

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Session 8 – Exercises – Efficiency Ratios

17. Days in inventory of Year 2 is closest to:

A. 60.0 days
B. 69.0 days
C. 66.0 days
D. 54.0 days