# Annual credit sales 500000 600000 debtors in the

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Annual credit sales 500000 600000 Debtors in the beginning 80000 90000 Debtors at the end 100000 110000 Days to be taken for the year: 360 Solution Average debtors = (Opening Debtors + Closing Debtors) / 2 Debtors turnover = Net Credit Annual Sales / Average Debtors Year 2015 year 2016 Average debtors = (80000 + 100000)/2 (90000 + 110000)/2 = Rs.90000 Rs.100000 A. debtors turnover = 500000 / 90000 600000 / 100000 = 5.56 times 6 times B. Average collection period = No. of working days / debtors turnover Year 2006 year 2007 = 360 / 5.56 360 / 6 = 64.7 days 60 days = or 65 days (approx)

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85 Illustration 10 From the following information, calculate average collection period: Rs. Total sales 100000 Cash sales 20000 Sales returns 7000 Total debtors at the end of the year 11000 Bills receivables 4000 Bad debts provision 1000 Creditors 10000 Solution: Average collection period = (Debtors + bill receivable) / net credit sales per day Net credit sales Rs. Total sales 100000 Less cash sales 20000 Credit sales 80000 Less returns 7000 73000 Net credit sales per day = 73000 / 365 = 200 Average collection period = 11000 + 4000 / 200 = 75 days Illustration 11 From the following information calculate average payment period Rs. Total purchases 400000 Cash purchases 50000 Purchases returns 20000 Creditors at the end 60000 Bills payable at the end 20000 Reserve for discount on creditors 5000 Solution Average payment period = (creditors + bills payable) / net credit purchases per day
86 = (creditors + Bills payable) / Net credit purchases * 365 Net credit purchases Rs. Total purchases 400000 Less cash purchases 50000 350000 Less returns 20000 Net credit purchases 330000 Average payment period = (60000 + 20000) * 365 / 330000 = 80000 *365 / 330000 = 88.48 days Note: 1. 365 days have been taken in a year 2. Reserve for discount on creditors is not considered while calculating average collection period because total creditors before deducing such reserve are to be taken Illustration 12 Rs. Cash 10000 Bills receivables 5000 Sundry debtors 25000 Stocks 20000 Sundry creditors 30000 Cost of sales 150000 Working capital turnover ratio = Cost of Sales / Net Working Capital Current assets = Rs.10000 + 5000 + 25000 + 20000 = Rs.60000 Current liabilities = Rs.30000 Net working capital = Current Assets Current Liabilities = Rs. 60000 30000 = Rs.30000 Working capital turnover ratio = 150000 / 30000 = 5 times Illustration 13 The ratios relating to cosmos ltd are given as follows Gross profit ratio : 15 % Stock velocity : 6 months Debtor’s velocity : 3 months

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87 Creditor’s velocity : 3 months Gross profit for the year ending December 31, 2015 amounts to Rs.60000. closing stock is equal to opening stock Find out sales a. closing stock b. sundry debtors c. sundry creditors Solution sales : Gross profit ratio = gross profit / sales * 100 15 % = Rs.60000 / sales Sales = Rs. 60000 * 100 / 15 = Rs. 400000 closing stock Stock velocity = average stock / cost of goods sold Cost of goods sold = sales gross profit = Rs.400000 Rs.60000 = Rs.340000 6/12 = average stock / 340000 Average stock = 340000 * 6/ 12 = Rs.170000 Since opening and closing stocks are the same so stock is Rs.170000 sundry debtors Debtors velocity = total debtors * No. of months / sales = total debtors * 12 / Rs.400000 Total debtors = 400000 * 3 / 12 = Rs.100000 sundry creditors For calculating sundry creditors, the figure for credit purchases will be required Cost of goods sold = opening stock + purchases closing stock Rs.340000 = Rs.170000 + Purchases Rs.170000 Purchases = Rs.340000 Creditors velocity = total creditors * No. of months / purchases = total creditors * 12 / Rs.340000 Total creditors = Rs.340000 * 3 / 12 = Rs. 85000
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