FINANCIAL RATIOS ANALYSIS

1. Complete the calculations for Chart 1:

A. Accounts Receivable Turnover Ratio:

Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable

For ABC Group:

Accounts Receivable Turnover Ratio = $324,000 / (($75,000 + $125,000) / 2) = $324,000 / $100,000 =

3.24

For 123 Company:

Accounts Receivable Turnover Ratio = $401,000 / (($92,000 + $123,000) / 2) = $401,000 / $107,500 ≈

3.73

B. Number of Days' Sales in Receivables Ratio:

Number of Days' Sales in Receivables Ratio = 365 days / Accounts Receivable Turnover Ratio

For ABC Group:

Number of Days' Sales in Receivables Ratio = 365 days / 3.24 ≈ 112.65 days

For 123 Company:

Number of Days' Sales in Receivables Ratio = 365 days / 3.73 ≈ 97.80 days
C. Interpretation of Outcomes and Investment Decision:

A lower number of days' sales in receivables indicates that the company collects its receivables more
quickly, which is favorable. Based on the calculations, 123 Company has a shorter collection period
(97.80 days) compared to ABC Group (112.65 days). Therefore, if you prioritize quicker cash collection,
you may consider investing in 123 Company.

2. Complete the calculations for Chart 2:

A. Inventory Turnover Ratio:

Inventory Turnover Ratio = Cost of Goods Sold / Average Inventory

For Year 1:

Inventory Turnover Ratio = $28,174 / (($29,000 + $10,826) / 2) = $28,174 / $19,913 ≈ 1.41

For Year 2:

Inventory Turnover Ratio = $12,281 / (($39,000 + $5,980) / 2) = $12,281 / $22,490 ≈ 0.55

B. Number of Days' Sales in Inventory Ratio:

Number of Days' Sales in Inventory Ratio = 365 days / Inventory Turnover Ratio

For Year 1:

Number of Days' Sales in Inventory Ratio = 365 days / 1.41 ≈ 258.87 days

For Year 2:

Number of Days' Sales in Inventory Ratio = 365 days / 0.55 ≈ 663.64 days

3. Interpretation of Outcomes:

For both the inventory turnover ratio and the number of days' sales in inventory ratio, a higher value
indicates that the company has a slower inventory turnover. In this case, Year 2 shows a significant
decrease in inventory turnover for both ratios, which could suggest potential inventory management
issues.
4. Reflection on Course Progress:

The material have learned so far has really awaken me up to think outside of the box. I was only thinking
of starting my own companies, not knowing that I can also be part of different companies by simply
buying shares from them. This material is really powerful and awesome. I never expected to learn such
principles from uopeople within such a short period of time. And the most interesting part is that these
principles are directly applicable in my daily life.

REFERENCE

Franklin, M. Graybeal, P. & Cooper, D. (2020). Principles of accounting, volume 1: Financial accounting.
Open Stax Rice University.