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Financial Information for robotics company (S) 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 (S) Sales 225,000 Cost of goods sold 105,000 Selling expenses 8,500 Administration expenses 6,000 Financial expe... show full transcript

Worked Solution & Example Answer:Financial Information for robotics company (S) 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)

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Answer

To calculate the accounts receivable turnover ratio, we use the formula:

$\text{Accounts Receivable Turnover Ratio} = \frac{\text{Sales}}{\text{Accounts Receivable}}$

Substituting the values: $\text{Accounts Receivable Turnover Ratio} = \frac{225,000}{30,000} = 7.5$

This means the company collects its average accounts receivable 7.5 times per year.

To find the days sales outstanding (DSO), we can further calculate: $DSO = \frac{365}{\text{Accounts Receivable Turnover Ratio}} = \frac{365}{7.5} \approx 49 \text{ days}$

Step 2

Interpret this business’s expense ratio (total expenses ÷ sales)

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Answer

To interpret the expense ratio for this business, we first find the total expenses by adding all expenses:

Cost of goods sold: 105,000
Selling expenses: 8,500
Administration expenses: 6,000
Financial expenses: 4,000

Total Expenses: $\text{Total Expenses} = 105,000 + 8,500 + 6,000 + 4,000 = 123,500$

Now, we calculate the expense ratio: $\text{Expense Ratio} = \frac{\text{Total Expenses}}{\text{Sales}} = \frac{123,500}{225,000} \approx 0.5489 \text{ or } 54.89\%$

This indicates that for every dollar the business makes in sales, approximately 54.89 cents is absorbed by expenses. This is significantly higher than the industry expense ratio of 10%, indicating that the business may have inefficiencies or higher costs compared to industry standards.

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Questions answered

Calculate the accounts receivable turnover ratio (sales ÷ accounts receivable)

Interpret this business’s expense ratio (total expenses ÷ sales)

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