There actually is enough information to answer these questions, if we
make several assumptions. Be very careful about the assumptions ?
checking with your finance prof to make sure that they?re not wrong:
Inventory turnover is defined as: Cost of Goods Sold / Average Inventory
IT IS NOT normally defined this way, which is why Siliconsamurai has
made the comment that he has. It?s normally defined as Sales /
Inventory ? and that?s how you?ll see Wall Street analysts define the
term in financial analyses:
A 360-day year. Except for lending purposes (when all 365 days are
important in interest calculations), it?s like assuming a 30-day month
? not true but close enough for comparative analysis.
Okay, now let?s get on to the answers:
1. Annual COGS = 12 x $30K = $360,000
Inventory turnover = ($360K/$30K) = 12
2. (60 days / 360 days) x $500M = $83.3 million of ARO or average
receivables outstanding. Note that 60 days worth of receivables is
extremely long in the real world.
3. Okay, first let?s define Current Ratio: Current Assets / Current Liabilities
Current Assets = cash + accounts receivable + inventory + marketable
securities + prepaid expenses
Current Liabilities = current portions of [interest + accounts payable
+ short-term loans due + expenses incurred but unpaid + other debts
A. Inventory is sold. If sold at a profit of say 30%, inventory
decreases by x and Accounts Receivable go up by 1.43x ? so the Current
Note: if sold at a LOSS, the Current Ratio decreases.
B. Again more assumptions: we?ll take the bank loan now ? but the
suppliers aren?t paid yet. And, no interest is due ? we set the loan
up for semi-annual payments.
Answer: no change in Current Ratio. When the suppliers are paid,
accounts payable goes down and the Current Ratio increases.
C. This also is a tough one: how overdue is the customer? It?s
routine to have customers who are 30 days overdue ? but past 90 days
they?d go into a bad debt allowance. In the Current Assets, ?Accounts
Receivable? are defined as AR minus the bad debt allowance.
I might recommend as an excellent resource for finance issues and definitions,
the Merrill Lynch publication, ?How to Read a Financial Report,? first
published in 1973, because it?s both more complete than simple sources
like Investopedia.com and yet succinct on these issues. I?ve been
through 3 copies in 30 years of business work and continually refer to
The online file (5.1M) is available here as an Acrobat (PDF) file and
you?ll want to see the Current Assets section:
Okay, now the answer: if overdue but not in the bad debt reserve: AR
goes to cash and NO CHANGE in Current Ratio.
If they were written off as a bad debt ? it?s "found" money. It?s not
in AR any more and ?magically? adds to Cash without a change in AR.
However, there?s an impact on net profits because you?ll be reversing
a former write-off -- but that has nothing to do with the Current
Ratio (sometimes called a "Quick Ratio").
D. Cash goes down, inventories go up ? at the same value. No change
in Currrent Ratio.
4. Here the assumption on growth is important. We?ll assume level
sales because the percentages decrease if sales are increasing; and
increase if sales are falling.
A 30-day delay means that we?re paying 30 days of last quarter plus 60
days of this quarter. So we?re paying 90 days DURING the quarter ?
two-thirds of it for current buys and one-third for last quarter?s
The answer?s the same with a 60-day delay ? we?re still paying 90 days
of receivables. However, in this case we?re paying 60 days from last
quarter and only 1/3 from the current period.
Inasmuch as some of this may be confusing, don?t hesitate to ask for a
clarification before rating this Google Answer.