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Financial Information for robotics company ($) Sales 225 000 Cost of goods sold 105 000 Selling expenses 8 500 Administration expenses 6 000 Financial expenses 4 000 Accounts receivable 30 000 Robotics company credit policy 30 days Industry expense ratio 10% (a) Calculate the accounts receivable turnover ratio (sales ÷ accounts receivable) for this business - HSC - SSCE Business Studies - Question 24 - 2020 - Paper 1
Question 24
Financial Information for robotics company ($) Sales 225 000 Cost of goods sold 105 000 Selling expenses 8 500 Administration expenses 6 000 Financial expenses 4 ... show full transcript
Worked Solution & Example Answer:Financial Information for robotics company ($) Sales 225 000 Cost of goods sold 105 000 Selling expenses 8 500 Administration expenses 6 000 Financial expenses 4 000 Accounts receivable 30 000 Robotics company credit policy 30 days Industry expense ratio 10% (a) Calculate the accounts receivable turnover ratio (sales ÷ accounts receivable) for this business - HSC - SSCE Business Studies - Question 24 - 2020 - Paper 1
Step 1
Calculate the accounts receivable turnover ratio (sales ÷ accounts receivable) for this business.
Answer
To calculate the accounts receivable turnover ratio, we use the formula:
ext{Accounts Receivable Turnover Ratio} = rac{ ext{Sales}}{ ext{Accounts Receivable}}.Given:
- Sales = 225,000
- Accounts Receivable = 30,000
We proceed to calculate:
ext{Accounts Receivable Turnover Ratio} = rac{225,000}{30,000} = 7.5 ext{ times per year}.This indicates that the company collects its average accounts receivable 7.5 times in a year.
Step 2
Interpret this business’s expense ratio (total expenses ÷ sales).
Answer
To interpret the business's expense ratio, we first need to calculate total expenses:
Total Expenses = Cost of Goods Sold + Selling Expenses + Administration Expenses + Financial Expenses
Substituting the values:
Next, we calculate the expense ratio:
ext{Expense Ratio} = rac{ ext{Total Expenses}}{ ext{Sales}} = rac{123,500}{225,000} imes 100 = 54.22 \%.This means that for every dollar the business makes, approximately 54.22 cents is absorbed by expenses. Given the industry expense ratio of 10%, this business is significantly higher, indicating potential inefficiencies in cost management.