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Old Wednesday, June 30, 2010
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Total Assets:

Total Asset Turnover Ratio = Sales / Total Assets
Or 1.2 = 1,800,000 / Total Assets

Total Assets : Rs. 1,500,000


Accounts Receivable:

Average Collection Period = 360 days / Accounts Receivable Turnover

Average Collection period is given in data : 40 days

Hence:
40 days = 360 days / Accounts Receivable Turnover
Accounts Receivable Turnover = 9

Accounts Receivable Turnover = Sales / Accounts Receivable
9 = 1,800,000 / Accounts Receivable

Accounts Receivable = 200,000


Inventories:

Inventroy Turnover Ratio = Cost of Goods Sold / Average Inventory

Cost of Goods Sold = Opening Stock + Purchases - Ending Stock

Or

Gross Profit = Sales - Cost of Goods Sold

Hence:

Cost of Goods Sold = Sales - GP

GP Ratio = GP / Sales * 100

GP Ratio is given in data: 25%
Sales is given in data : 1,800,000

25 = GP / 1,800,000 * 100
GP = 450,000
Hence:

COGS = Sales - GP
COGS = 1,800,000 - 450,000

COGS = 1,350,000

Inventory Turnover Ratio is given in data : 6

By putting these values in:

Inventroy Turnover Ratio = Cost of Goods Sold / Average Inventory

6 = 1,350,000 / Average Inventory

Average Inventory = 225,000


If your inventory figure comes Rs.225,000 then ultimately other figures will be different.

By taking Rs.225,000 as inventory we have following results:

Current Assets: Rs.480,000 (Current Assets = Cash + Marketable Securities + Accounts Receivable + Inventories or CA = 30,000 + 25,000 + 200,000 + 225,000)

Net Fixed Assets: Rs. 1020,000 ( Net Fixed Assets = TotaL Assets - CA or Net Fixed Assets = 1500,000 - 480,000)


Current Liabilities : Rs. 300,000 (Calculated from Current Ratio i.e. CR = CA / CL Or 1.6 = 480,000 / CL )

Notes Payable : Rs. 160,000 ( Notes Payable = CL - Accounts Payable - Accruals or Notes Payable = 300,000 - 120,000 - 20,000)

Long Term Debt: Rs. 600,000 (Long Term Debt = Total Balance Sheet Footing - CL - Stockholders's equity or Long Term Debt = 1,500,000 - 300,000 - 600,000)


Note: Purchases or Sales are assumed as net figures in this calculation.


Please members do confirm the correction of this solution.

Regards


Quote:
Originally Posted by irum View Post
Solution





Balance Sheet as of December 31 2007



Cash $30,000
marketable securities 25,000
Accounts Receivable 200000
Inventories 3,00,000
Current Assets 555000

Net fixed assets 9,45,000



Total Assets 1500,000

Accounts Payable $120,000
Bank Loan 2,06,875
Accruals 20,000
Current Liabilities 3,46,875
Long term debts 5,53,725
Common Stock and retained earnings 600,000
Total Liabilities and Equity 1500,000
(W-1) Inventory turnover ratio=6.0

Inventory turnover ratio= sales/average inventories
6.0= 1800, 000/ average inventories
Average inventories= 1800, 000 /6.0
Average inventories= 300,000

(W-2) Average collection Period=40 days
Average collection Period=Average Account Receivable * 360 days/ sales
40 days= Average Account Receivables*360/18, 00,000
18, 00,000*40/360 = Average Account Receivables
Avg. Account Receivables= 200,000

(W-3) Total Asset Turnover Ration=1.20
1.20= sales/Total Assets
Total Asset = sales/TAT
=18, 00,000/1.20
=15, 00,000

(W-4) Fixed assets= Total Asset- Current Asset
=15, 00,000-5, 55,000
=9, 45,000

(W-5) Current Ratio= Current asset/Current Liabilities
1.60 =5, 55, 000/CL
CL= 5, 55, 000/1.60
= 3, 46,875

(W-6) Total debt = C liabilities +Long term debts
900,000 =3, 46,875 + ?
Long term Debt = 900,000 -3, 46,875
553185

(W-7)Total debt can be find out as
Total debt= Total Liabilities and Equity- Common Stock and retained earnings
900,000 =1500, 000-600,000

(W-8) Bank Loan= Current liabilities - Accounts Payable- Accruals
206875 =3, 46,875- 120,000-20,000

Provided information in question no 3, PAPER-1, are not correct, the actual data comprises as under (SOURCE Financial Management by Gitman)
Complete the 2007 balance sheet for Premier Industries using the information that follows it.


Balance Sheet as of December 31 2007



Cash & marketable securities 55,000
Accounts Receivable
Inventories
Current Assets
Net fixed assets
Total Assets

Accounts payable $120,000
Bank Loan ?
Accruals 20,000
Current Liabilities ?
Long term debts ?
Common Stock and retained earnings 600,000
Total Liabilities and Equity ?
Thanks a lot Irum for solving this question. Can you please re-check your formula for Inventory Turnover and calculation of Average inventory?
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Last edited by Princess Royal; Thursday, July 01, 2010 at 01:35 PM.
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