Accounting Business Reporting for Decision Making

556 Accounting: Business Reporting for Decision Making

Self-evaluation activities

13.1 David Ltd has introduced a new credit policy of ‘3/10, net 30’ in an effort to reduce the value of

its accounts receivable and the number of days the debts remain outstanding.

Required

a. How much is payable by Cheens Ltd for a $100 000 invoice paid on the ninth day after issue for

goods purchased?

b. The cash forgone by David Ltd is a cost that purchased a benefit of how many days earlier pay-

ment if Cheens Ltd had always paid on the 30th day?

SOLUTION TO 13.1

a. $100 000 − (0.03 × 100 000) = $97 000.

b. Benefit = 30 − 9 = 21 days.

13.2 Holly Ltd provides you with the following inventory and cost data for the three years ending

December 2017.

Item 2015 2016 2017

Average inventory 180 240 300

Cost of sales 880 1 000 1 100

Inventory turnover (days)

Required

a. Calculate the inventory turnover for 2015 to 2017.

b. Describe the trend of inventory turnover during this three-year period.

SOLUTION TO 13.2

a. Item^201520162017

Average inventory 180 240 300

Cost of sales 880 1 000 1 100

Inventory turnover (days) 4.88 4.16 3.66

b. The inventory turnover for Holly Ltd decreased from 4.88 times to 3.66 times per year. When

converted to a daily rate, this is approximately 74 days in 2015 and 99 days in 2017. So, in

2017 the inventory is turning over only just over three times per year and the turnover has

significantly slowed during the three-year period. Depending on the type of business and the

industry the business works in, this is probably not a satisfactory trend. Holly Ltd will need to

investigate the reasons for this decrease. There could have been a major change in inventory

mix during this period, which could explain the decrease in ratio (e.g. is Holly Ltd selling more

expensive items that are slower to convert to sales?).

13.3 During the past five years, Goodrem Ltd had the following trade creditors at balance date and

made the following purchases (in millions).

Item 2014 2015 2016 2017 2018

Trade creditors 800 1 000 1 200 1 400 1 600

Credit purchases 4 000 4 400 4 800 5 000 5 200

Required

a. Calculate the creditors turnover in times per year.

b. Calculate the creditors turnover in days.

c. Comment on the trend in creditors turnover.