Flite Corporation has issued common stock only. The company has been successful and has a gross profit rate of 20%. The information shown below was taken from the company's financial statements. Beginning inventory $ 482 , 000 Purchases 4 , 036 , 000 Ending inventory ? Average accounts receivable 800 , 000 Average common stockholders’ equity 3 , 500 , 000 Sales (all on credit) 5 , 000 , 000 Net income 385 , 000 \begin{array} { l c } ext { Beginning inventory } & \$ 482,000 \ ext { Purchases } & 4,036,000 \ ext { Ending inventory } & ? \ ext { Average accounts receivable } & 800,000 \ ext { Average common stockholders ' equity } & 3,500,000 \ ext { Sales (all on credit) } & 5,000,000 \ ext { Net income } & 385,000\end{array} Beginning inventory Purchases Ending inventory Average accounts receivable Average common stockholders’ equity Sales (all on credit) Net income $482 , 000 4 , 036 , 000 ? 800 , 000 3 , 500 , 000 5 , 000 , 000 385 , 000 InstructionsCompute the following:(a) Accounts receivable turnover and the average collection period.(b) Inventory turnover and the days in inventory.(c) Return on common stockholders' equity.

Question

Flite Corporation has issued common stock only. The company has been successful and has a gross profit rate of 20%. The information shown below was taken from the company's financial statements.    Beginning inventory  $ 482 , 000  Purchases  4 , 036 , 000  Ending inventory  ?  Average accounts receivable  800 , 000  Average common stockholders’ equity  3 , 500 , 000  Sales (all on credit)  5 , 000 , 000  Net income  385 , 000 \begin{array} { l c } 	ext { Beginning inventory }  &  \$ 482,000 \	ext { Purchases }  &  4,036,000 \	ext { Ending inventory }  &  ? \	ext { Average accounts receivable }  &  800,000 \	ext { Average common stockholders '  equity }  &  3,500,000 \	ext { Sales (all on credit) }  &  5,000,000 \	ext { Net income }  &  385,000\end{array}  Beginning inventory   Purchases   Ending inventory   Average accounts receivable   Average common stockholders’ equity   Sales (all on credit)   Net income  ​ $482 , 000 4 , 036 , 000 ? 800 , 000 3 , 500 , 000 5 , 000 , 000 385 , 000 ​   InstructionsCompute the following:(a) Accounts receivable turnover and the average collection period.(b) Inventory turnover and the days in inventory.(c) Return on common stockholders' equity.

Pragya Kunwar · Accepted Answer

Final Answer :  (a)  Accounts receivable turnover  = −  Credit sales   Average accounts receivable  = $ 5 , 000 , 000 ÷ $ 800 , 000 = 6.25  times   Average collection period  = 365  days   Receivables turnover  = 365 ÷ 6.25  times  = 58.4  days  \begin{aligned}	ext { Accounts receivable turnover }  &  = - \frac { 	ext { Credit sales } } { 	ext { Average accounts receivable } } \ &  = \$ 5,000,000 \div \$ 800,000 \ &  = 6.25 	ext { times } \	ext { Average collection period }  &  = \frac { 365 	ext { days } } { 	ext { Receivables turnover } } \ &  = 365 \div 6.25 	ext { times } \ &  = 58.4 	ext { days }\end{aligned}  Accounts receivable turnover   Average collection period  ​ = −  Average accounts receivable   Credit sales  ​ = $5 , 000 , 000 ÷ $800 , 000 = 6.25  times  =  Receivables turnover  365  days  ​ = 365 ÷ 6.25  times  = 58.4  days  ​ (b) Inventory turnover   = = =   Cost of goods sold   ÷ \div ÷   Average inventoryFirst calculate ending inventory.  Beginning I nventory  482 , 000  + Purchases  4 , 036 , 000  - Cost of Goods Sold  ( 4 , 000 , 000 ) ∗  Ending Inventory  $ 518 , 000 \begin{array}{lr}	ext { Beginning I nventory }  &  482,000 \	ext { + Purchases }  &  4,036,000 \	ext { - Cost of Goods Sold }  &  (4,000,000)^{*} \	ext { Ending Inventory }  &  \$ \quad 518,000\end{array}  Beginning I nventory   + Purchases   - Cost of Goods Sold   Ending Inventory  ​ 482 , 000 4 , 036 , 000 ( 4 , 000 , 000 ) ∗ $ 518 , 000 ​   *Since the gross profit ratio is 20% the cost of goods sold ratio is 80%.80% × $5000000 (net sales) = $4000000.Ending Inventory = $518000 (per above)Average Inventory = ($482000 + $518000) ÷ 2 = $500000Inventory Turnover = $4000000 ÷ $500000 = 8 timesDays in Inventory = 365 days ÷ 8 times = 45.6 days    (c) Return on common stackholders’ equity  =  Net income   Average common stockholders’ equity  $ 385 , 000 ÷ $ 3 , 500 , 000 = 11 % \begin{array} { l } 	ext { (c) Return on common stackholders '  equity } = \frac { 	ext { Net income } } { 	ext { Average common stockholders '  equity } } \\$ 385,000 \div \$ 3,500,000 = 11 \%\end{array}  (c) Return on common stackholders’ equity  =  Average common stockholders’ equity   Net income  ​ $385 , 000 ÷ $3 , 500 , 000 = 11% ​

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