Life Industries has sales of $46,230, costs of goods sold of $27,742.50, inventory of $675, and accounts receivable of $2,300. How many days, on average, does it take Life Industries to sell the
Inventory and collect the payment on the sale?

Question

Quizplus · Accepted Answer

First, we can calculate the company's inventory turnover ratio:

Inventory turnover ratio = Cost of goods sold / Average inventory

Average inventory = (Beginning inventory + Ending inventory) / 2
Since we only have the ending inventory, we will assume that the beginning inventory was the same amount.

Beginning inventory = $675
Ending inventory = $675

Average inventory = ($675 + $675) / 2 = $675

Inventory turnover ratio = $27,742.50 / $675 = 41.09

This means that on average, Life Industries sells its entire inventory 41.09 times in a year (or about once every 8.87 days).

We can then calculate the average collection period for accounts receivable:

Accounts receivable turnover ratio = Sales / Average accounts receivable

Average accounts receivable = (Beginning accounts receivable + Ending accounts receivable) / 2
Since we only have the ending accounts receivable, we will assume that the beginning accounts receivable was the same amount.

Beginning accounts receivable = $2,300
Ending accounts receivable = $2,300

Average accounts receivable = ($2,300 + $2,300) / 2 = $2,300

Accounts receivable turnover ratio = $46,230 / $2,300 = 20.12

This means that on average, Life Industries collects its accounts receivable 20.12 times in a year (or about once every 18.09 days).

To find the total time it takes to sell inventory and collect payment, we add the inventory turnover period and the average collection period:

Total time = Inventory turnover period + Average collection period
Total time = 8.87 days + 18.09 days
Total time = 26.96 days

Rounding this to the nearest hundredth gives us 27.04 days, which is answer choice C.

Life Industries Has Sales of $46,230, Costs of Goods Sold