S.M. Ltd. had sales of $400,000 in 2011 (70% of its sales are credit). The company's gross profit...

Question:

S.M. Ltd. had sales of $400,000 in 2011 (70% of its sales are credit). The company's gross profit margin is 10%, its ending inventory is $80,000, and its accounts receivable is $25,000. What amount of funds can be generated by the company if it increases its inventory turnover ratio to 10 and its accounts receivable turnover ratio to 18?

Gross Margin:

Gross Margin can be computed by deducting the cost of goods sold and cost of services rendered to the total sales or revenues generated. This account will be used in settling other expenses of the company such as selling and administrative costs which are not directly related in the production of goods. As the gross profit rate increases, the cost of goods sold rate decreases.

Answer and Explanation:

To compute for the current cost of goods sold, gross margin, inventory turnover and accounts receivable turnover:

a. Cost of Goods Sold and Gross Margin

Sales 400,000
Gross Profit Rate 10%
Gross Profit 40,000


Sales 400,000
Gross Profit 40,000
Cost of Goods Sold 360,000


b. Accounts Receivable Turnover

Sales 400,000
Accounts Receivables 25,000
Accounts Receivable Turnover 16 times


c. Inventory Turnover

Cost of Goods Sold 360,000
Inventory 80,000
Inventory Turnover 4.5


To compute for the current cost of goods sold, gross margin, inventory turnover and accounts receivable turnover:

a. Cost of Goods Sold

Inventory 80,000
Inventory Turnover 10
Cost of Goods Sold 800,000


b. Sales

Sales (800,000/90%) 888,888.89
Accounts Receivable Turnover 16
Average Accounts Receivables 55,555.56


c. Gross Profit

Sales (800,000/90%) 888,888.89
Cost of Goods Sold 800,000
Gross Margin 88,888.89

Learn more about this topic:

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How to Calculate Gross Profit Margin: Definition & Formula

from Financial Accounting: Help and Review

Chapter 5 / Lesson 17
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