Receivables Turnover, DSO, Inventory Turnover, and DSI

Answer D. Year 1 average inventory = (70,000 + 80,000) / 2 = 75,000, so Year 1 DSI = (75,000 / 600,000) × 365 = 45.625 days (≈0.125 year). To keep that DSI with Year 2 COGS of 720,000, the required average inventory = 0.125 × 720,000 = 90,000. With Year 2 beginning inventory of 80,000, the ending inventory must be 2 × 90,000 − 80,000 = 100,000.

Why not A: Tempting because it is management's reported amount; a candidate may accept the reported figure. It is wrong because an ending inventory of $125,000 yields an average of (80,000 + 125,000)/2 = 102,500 and thus a DSI higher than Year 1's, so it does not maintain the prior DSI.

Why not B: Tempting because $80,000 is the beginning inventory for Year 2 and might be mistaken for the required ending balance by a candidate who ignores the DSI computation. It is wrong because that ending would give an average of 80,000 and a lower DSI than Year 1.

Why not C: Tempting because $90,000 is the required average inventory for Year 2 to maintain the same DSI; a candidate who computes the average correctly may stop there. It is wrong because the question asks for the ending inventory, not the average; with a beginning balance of 80,000 the ending must be 100,000 to achieve a 90,000 average.

Answer D. Borrowing $30 and immediately purchasing inventory increases current assets and current liabilities by the same amount. Because the initial current ratio (150/80 = 1.875) was greater than 1, adding the same amount to numerator and denominator reduces the current ratio (new CR = 180/110 ≈ 1.636). Inventory turnover falls because ending inventory rises from $40 to $70 while COGS is unchanged (turnover drops from 240/40 = 6.0 to 240/70 ≈ 3.43).

Why not A: This is tempting because current assets and inventory both increase, which may look like improved liquidity and efficiency. It is wrong because current liabilities also increase by the same amount, and with an initial current ratio greater than 1 the ratio actually falls; turnover falls as the inventory denominator increases while COGS is unchanged.

Why not B: This attracts candidates who think adding the same amount to current assets and current liabilities leaves the current ratio unchanged. That only occurs if the initial current ratio equals 1; because the initial ratio was 1.875, the ratio moves toward 1 and therefore decreases. Inventory turnover does decrease, but the current ratio is not unchanged.

Why not C: A student might correctly see that the current ratio falls (current liabilities rose) but then assume more inventory will speed sales and raise turnover. That is incorrect here because COGS is unchanged and ending inventory rises, so turnover (COGS/ending inventory) decreases.

Answer A. Receivables turnover = net credit sales ÷ average accounts receivable. Average receivables = (180,000 + 220,000) / 2 = 200,000, so turnover = 1,200,000 / 200,000 = 6.0 times.

Why not B: Tempting because using the ending receivable only gives 1,200,000 / 220,000 ≈ 5.45 (≈5.5). It's incorrect because the annual receivables turnover conventionally uses the average receivable for the period.

Why not C: Tempting because a careless arithmetic error or a miscomputed average could produce a denominator like $240,000, yielding 1,200,000 / 240,000 = 5.0; wrong because the correct average receivable is $200,000, so turnover is 6.0.

Why not D: Tempting because using the beginning receivable only gives 1,200,000 / 180,000 ≈ 6.67 (≈6.7). It's incorrect for the same reason, the full-year turnover should use the average of beginning and ending receivables.

Answer A. Receivables turnover fell from 8.0 times in Year 1 ($2,400,000 ÷ $300,000) to 6.0 times in Year 2 ($2,700,000 ÷ $450,000), so the company converted receivables to cash less quickly. Days sales outstanding increased from about 46 days (365 ÷ 8) to about 61 days (365 ÷ 6), which supports the conclusion that collection efficiency worsened in Year 2.

Why not B: Tempting because sales rose, but collection efficiency is measured by receivables turnover or DSO, not sales growth alone. Here, average receivables grew faster than credit sales, so turnover fell and collections slowed.

Why not C: This is tempting since receivables are a current asset, but a larger receivables balance does not guarantee better liquidity, especially when turnover declines. Slower collections can reduce near-term cash flow quality.

Why not D: Receivables turnover measures how quickly receivables are collected, not profit margins. A lower turnover does not by itself indicate lower profitability; no data on costs or margins is provided.

Answer D. Accounts receivable turnover = net credit sales ÷ average net accounts receivable. Net credit sales = $1,200,000 × 80% = $960,000; average receivables = ($150,000 + $170,000) ÷ 2 = $160,000. Therefore, turnover = $960,000 ÷ $160,000 = 6.00 times.

Why not A: This reflects both shortcuts: using total sales (not credit sales) and using ending receivables instead of the average, producing an inflated turnover (1,200,000 ÷ 170,000 ≈ 7.06).

Why not B: This uses total net sales divided by average receivables (1,200,000 ÷ 160,000 = 7.50). It is tempting but incorrect because receivables turnover should use credit sales only (cash sales do not create receivables).

Why not C: This divides credit sales by ending receivables (960,000 ÷ 170,000 ≈ 5.65). The standard measure uses average receivables for the period, not just the year-end balance.