Question

The following data are taken from or calculated from the financial statements: Current Year Preceding Year Average accounts receivable (net) $123,000 $95,000 Sales on account 950,000 825,000 a. Assuming that credit terms on all sales are n/45, determine for each year (1) the accounts receivable turnover and (2) the number of days' sales in receivables. Round intermediate calculations to whole numbers and final answers to two decimal places. 1. The accounts receivable turnover: Current Year Preceding Year 2. The number of days' sales in receivables: Assume a 365-day year. Current Year days Preceding Year days b. Comment on any significant trends revealed by the data. Sales during the current year, indicating a(n) trend. The accounts receivable turnover has . Based on credit terms of n/45, the current year turnover indicates that receivables are not being collected within the 45-day period. Likewise, the number of days' sales in receivables indicates a(n) trend.

Answer 1

Answer:

Account receivables Turnover = net credit sales divided by Average Accounts receivables

This measure gives the business an indication how many times it collected its debts over the year. when compared to standard or industry average can define how efficient the business credit control is.

For current year:

Account receivables Turnover = $950,000 / $123,000

= 7.72 times

For previous year:

Account receivables Turnover = $825,000 / $95,000

= 8.68 times

B.

Number of days sales in receivables = number of days in period divided by Accounts receivable turnover

This is an expression of the Accounts receivable turnover into days to give an indication of our collection days and understand what areas may need to be addressed to fix any loopholes.

For current year:

Number of days sales in receivables = 365 days / 7.72

= 47days

For Previous year:

Number of days sales in receivables = 365 days / 8.68

= 42 days

C.

Trends can be picked out of these results to guide the business in its credit control policies.

Credit terms is 45 days. This implies that the maximum expected AR turnover shouldn't be less than 8.1 times. Anything less than 8.1 times indicates we are servicing more credit sales than we should, and we should find means of halting the credit sales because payment isn't coming into the business which may in no time be a huge cash flow concern.

This is what happened in the current year , our AR turnover slipped to 7.72 times from a healthy 8.68 times in previous year.

The Number of days sales in receivables helps put more context to the Receivables balance we are carrying.

Holding receivables above ones credit limit (days) means controls have failed in driving collections up. The conclusion is business is driving up short term benefit in Revenue at the expense of long term cash flow and going-concern problem. It shouldn't be encouraged, and corrections need to be put in place promptly.