Integrating problem; inventories and accounts receivable
Response to the following problem:
Inverness Steel Corporation is a producer of flat-rolled carbon, stainless and electrical steels, and tubular products. The company's income statement for the 2016 fiscal year reported the following information ($ in millions):
Sales $6,255
Cost of goods sold 5,190
The company's balance sheets for 2016 and 2015 included the following information ($ in millions):
2016 2015
Current assets
Accounts receivable, net $703 $583
Inventories 880 808
The statement of cash flows reported bad debt expense for 2016 of $8 million. The summary of significant accounting policies included the following notes ($ in millions):
Required:
Using the information provided:
1. Determine the amount of accounts receivable Inverness wrote off during 2016.
2. Calculate the amount of cash collected from customers during 2016.
3. Calculate what cost of goods sold would have been for 2016 if the company had used average cost to value its entire inventory.
4. Calculate the following ratios for 2016:
a. Receivables turnover ratio
b. Inventory turnover ratio
c. Gross profit ratio
5. Explain briefly what caused the income generated by the liquidation of LIFO layers. Assuming an income tax rate of 35%, what was the effect of the liquidation of LIFO layers on cost of goods sold in 2016?