Average time raw materials are in inventory

- Period of credit taken from suppliers

+ Time taken to produce goods
+ Time finished goods are in inventory after
production is completed
+ Time taken by customers to pay for
goods
SYMPTOMS SOLUTIONS

• ↑↑ revenue • Finance from share issues

• ↑↑ current assets • Better inventory and receivables

control
• ↑↑ non-current assets
• Postpone expansion plans
• Assets financed by trade Maintain/increase proportion of long-
payables/bank overdraft term finance

• Little/no ↑ in proprietors’ capital

• ↓ current/quick ratios
 20x4 20x5 changes comment Why ?
Gross profit 64.6 % 62.5 % Decrease Poor
margin
Net profit 37.9 % 37.1 % Decrease Poor
margin
Asset turnover 0.98 x 1.02 x Increase Good
Current ratio 2.6 x 2.5 x Decrease Poor
Quick ratio 1.6 x 1.3 x Decrease Poor
Receivable 53 days 68 days Increase Poor
collection
period
Payables 129 days 122 days Decrease Poor
payment period
Inventory days ( 129 days 144 days Increase Poor
finished goods)
Inventory days 43 days 46 days Increase Poor
1. Calculate the annual cost of sales a) Raw materials

( % cost of sales x sales ) 15% x $2,200,000 = 330, 000

b) Labour

20% x $2,200, 000 = 440, 000

c) Variable production overhead

d) Fixed production overhead

?

e) Other costs
?
2. Calculate the current assets a) Raw materials
(n/52 x cost of raw materials)

4/52 x 330, 000 = 25, 385

b) Work In Progress
(% of completion x n/52 x cost )

(i) Raw materials

75% x 2/52 x 330, 000 = 9, 519

(ii) Labour

50% x 2/52 x 440, 000 = 8, 462