Question

Solomon Company reports the following in its most recent year of operations: Sales, $1,000,000 (all on account) Cost of goods sold, $490,000 Gross profit, $510,000 Accounts receivable, beginning of year, $110,000 Accounts receivable, end of year, $140,000 Merchandise inventory, beginning of year, $55,000 Merchandise inventory, end of year, $60,000. Based on these balances, compute: The accounts receivable turnover. The inventory turnover.

Answer 1

Accounts receivable turnover = 8 times

Inventory turnover = 8.5 times

Step-by-step explanation:

The computations are shown below:

1. Accounts receivable turnover ratio:

= Credit sales ÷ average accounts receivable

where,

Average accounts receivable = (Opening balance of Accounts receivable + ending balance of Accounts receivable) ÷ 2

= ($110,000 + $140,000) ÷ 2

= $125,000

And, the net credit sale is $1,000,000

Now put these values to the above formula

So, the answer would be equal to

= $1,000,000 ÷ $125,000

= 8 times

2. Inventory turnover ratio:

= Cost of goods sold ÷ average inventory

where,

Average inventory = (Opening balance of inventory + ending balance of inventory) ÷ 2

= ($55,000 + $60,000) ÷ 2

= $57,500

And, the cost of good sold is $490,000

Now put these values to the above formula

So, the answer would be equal to

= $490,000 ÷ $57,500

= 8.5 times