Beverly Corp had total sales of $1,200,000 in 2010 (80 percent of its

Beverly Corp had total sales of $1,200,000 in 2010 (80 percent of its sales are credit). The company’s gross profit
margin is 25 percent, its ending inventory is $150,000, and its accounts receivable balance is $90,000.

What
additional amount of cash could the firm have generated if it had increased its inventory turnover ratio to 9.0
and reduced its average collection period to 28.21875 days?

ANSWER

Currently, cost of goods sold is $900,000 and inventory turnover is 6. To increase inventory turnover to 9, the inventory
balance would need to decrease to $100,000, or a decrease of $50,000, resulting in additional cash of $50,000.