Example: Working capital turnover
$ 1,352,00 / $76,400 = 17.70 times
The working capital was used 17.7 times during the year. The lower the ratio, the greater the WC turnover ratio.
WC (20X2) $124,000 = $338,000 - $214,000
WC (20X1) $28,800 = $221,000 - $ 192,000
Average WC = ($124,000 + 28,800) / 2 = $76,400
What kind of ratio do the interested parties prefer? Example: Food inventory turnover
$122,000 / $10,000 = 12.2 times
Example: Beverage turnover
$28,000 / $6,000 = 4.67 times
Average Food Inventory: $11,000 + $9,000 / 2 = $10,000
Average Beverage Inventory: $6,000 + $6,000 = $6,000
The food inventory turned over 12.2 times (approximately 1 per month)
The beverage turnover of 4.67 means that the beverage inventory of $6,000 required restocking approx. every 78 days. = 365 days / turnover of 4.67 (not all beverage items are sold evenly (some items would have to be restocked more frequently)
What kind of turnover do all parties involved prefer? 8th EditionN. Gregory Mankiw814 explanations
9th EditionAlan J. Marcus, Alex Kane, Zvi Bodie689 explanations
8th EditionN. Gregory Mankiw502 explanations
4th EditionN. Gregory Mankiw393 explanations
ACCOUNTINGNorthern Equipment Corporation purchased all the outstanding common stock of Pioneer Equipment Rental for $5,600,000 in cash. The book values and fair values of Pioneer's assets and liabilities were:$
$$
\begin{matrix}
\text{ } & \text{Book Value} & \text{Fair Value}\\ \hline
\text{Accounts Receivable} & \text{$\$ 750,000$} & \text{$\$ 650,000$}\\
\text{Buildings} & \text{$4,100,000$} & \text{$4,800,000$}\\
\text{Equipment} & \text{$110,000$} & \text{$200,000$}\\
\text{Accounts Payable} & \underline{(750,000)} & \underline{(750,000)}\\
\text{Net assets} & \underline{\underline{\$ 4,210,000}} & \underline{\underline{\$ 4,900,000}}\\
\end{matrix}
$$
$ 1. Calculate the amount Northern Equipment should report for goodwill. 2. Record Northern Equipment's acquisition of Pioneer Equipment Rental. ACCOUNTINGLetni Corporation engages in the manufacture and sale of semiconductor chips for the computing and communications industries. During the past year, operating revenues remained relatively flat compared to the prior year but management notices a big increase in accounts receivable. The increase in receivables is largely due to the recent economic slowdown in the computing and telecommunications industries. Many of the company's customers are having financial difficulty, lengthening the period of time it takes to collect on accounts. Below are year-end amounts.
$$
\begin{matrix}
\text{ } & \text{Operating} & \text{Accounts} & \text{Average} & \text{Accounts}\\
\text{Age Group} & \text{Revenue} & \text{Receivable} & \text{Age} & \text{Written Off}\\ \hline
\text{Two years ago} & \text{$\$ 1,300,000$} & \text{$\$ 150,000$} & \text{5 days} & \text{\$ 0}\\
\text{Last year} & \text{$1,600,000$} & \text{$160,000$} & \text{7 days} & \text{$1,000$}\\
\text{Current year} & \text{$1,700,000$} & \text{$330,000$} & \text{40 days} & \text{0}\\
\end{matrix}
$$
Paul, the CEO of Letni, notices that accounts written off over the past three years have been minimal and, therefore, suggests that no allowance for uncollectible accounts be established in the current year. Any account proving uncollectible can be charged to next year's financial statements (the direct write-off method). 1. Do you agree with Paul's reasoning? Explain. 2. Suppose that other companies in these industries have had similar increasing trends in accounts receivable aging. These companies also had very successful collections in the past but now estimate uncollectible accounts to be 25% because of the significant downturn in the industries. If Letni uses the allowance method estimated at 25% of accounts receivable, what should be the balance of Allowance for Uncollectible Accounts at the end of the current year? 3. Based on your answer in Requirement 2, for what amount will total assets and expenses be misstated in the current year if Letni uses the direct write-off method? Ignore tax effects.
