Q.13 The total sales of a firm is Rs.325000. It has a gross profit margin of 10 per cent and current ratio of 2. The firms current liabilities are Rs.48000; inventories Rs.24000 and cash Rs.9000.

1. Determine the average inventory to be carried by the firm, if an inventory turnover of 3 times is expected? (assume a 360-day per year)

Inventory turnover = COGS/Avg. Inventory

Since gross profit margin is 15 per cent, the COGS should be 85 percent of sales

COGS = 0.85 X 325000 =

Thus, Avg. Inventory = COGS/3 times =

2. Determine the average collection period if the opening balance of debtors is intended to be of Rs.40000? (assume a 360-day per year)

Avg. Collection period = Avg. debtors/credit sales X 360

Avg. debtors = (opening debtors + closing debtors)/ 2

Closing balance of debtors is found as follows:

Current assets (2 of current liabilities) Rs. 960000

(-) inventories Rs.24000

(-) cash Rs. 9000

Rs. 33000

Therefore, Debtors Rs 63000

Average Debtors = (Rs. 63000+ Rs. 40000)/2 = Rs. 51500

Average collection period = (Rs. 51500/Rs.325000) X 360 = 57 days