Selected information taken from the accounting records of Vigor Company follows: Net accounts receivable at December 31, 2016 $ 900,000
Net accounts receivable at December 31, 2017 $ 1,000,000
Accounts receivable turnover 5 to 1
Inventories at December 31, 2016 $ 1,100,000
Inventories at December 31, 2017 $ 1,200,000
Inventory turnover 4 to 1
Required:
1. What was Vigor s gross profit for 2017?
2. Suppose that there are 360 business days in the year. What were the number of days sales outstanding in average receivables and the number of days sales outstanding in average inventories, respectively, for 2017?

Answer and Explanation:

The computation is shown below:

But the following calculations must be done

Account receivable turnover = Net sales ÷ average account receivable

5 = Net sales ÷ ($900,000 + $1,000,000) ÷ 3

5 = Net sales ÷ $950,000

Now the net sales is

= $950,000 × 5

= $4,750,000

And,

Inventory turnover ratio = Cost of goods sold ÷ average of account receivable

4 = Cost of goods sold ÷ ($1,100,000 + $1,200,000) ÷ 3

4 = Cost of goods sold ÷ $1,150,000

Cost of goods sold

= $1,150,000 × 4

= $4,600,000

Now the gross profit is

a. The gross profit is

= Sales - cost of goods sold

= $4,750,000 - $4,600,000

= $150,000

2. The days sales outstanding in both the cases are as follows:

DSO in inventory

= 360 ÷ 4

= 90 days

And, DSO in account receivable

= 360 ÷ 5

= 72 days