financial reporting and analysis Gibson 12 e chapter 6 page 237 problem 6-3 part

Question

financial reporting and analysis Gibson 12 e
chapter 6 page 237 problem 6-3
part a) Day sales in receivable , I don't understand the logic behind using the beginning balance as opposed to ending balance of gross accounts receivable in calculations.
part b) I don't understand the logic for using ending balance of gross accounts receivable in calculations

Current liabilities Inventory tunover 20 400,000 3 times 47 Hawk Company wants to determine the liqpidity of i medivahi It has supplied you with he following g data regarding selected accounts for December 31,2009, and 2008 2009 2008 Net sales 1,180,178 $2,200,000 Receivables, less allowance for losses and discounts Beginning of year (allowance for losses aod End of year (allowance for losses and discounts, di 12-3004 2008 40 230,180 2009 -$11,180, 2008-$12,300) 220,385 240,360 Required a Co ompute the number of days' sales in receivables at December 31, 2009, and 2008. ha liquidity of Hawk Company reccivables oc b. Compute the accounts receivable tunover for 2009 and 2008.(Use year-end grossreceivables. neve leid

Explanation / Answer

(a) Calculation of number of days in receivables = (Average gross accounts receivables / Net sales) X 365 Average gross accounts receivables = (Beginning gross receivables + Ending gross receivables) / 2 2009 2008 Begining of the year $2,40,360 $2,30,180 Add: Adjustment $12,300 $7,180 $ 2,52,660 $2,37,360 Ending of the year $2,20,385 $2,40,360 Add: Adjustment $11,180 $12,300 $ 2,31,565 $ 2,52,660 Average gross accounts receivables ($252660+231565)/2 ($237360+$252660)/2 $ 2,42,113 $ 2,45,010 Number of days in receivables ($24112.5/$1180178) X 365 ($245010/$2200000) X 365 74.88 days 40.65 days Note : Beginning balance and ending balance are used while calculating average of accounts receivable in a year for computation of estimation of number of days in receivables. (b) Accounts receivable turnover ratio = Sales / Ending gross receivable 2009 2008 Sales $ 11,80,178 $ 22,00,000 Ending gross receivables $ 2,31,565 $ 2,52,660 Accounts receivable turnover ratio ($1180178/$231565) ($2200000/$252660) 5.10 8.71 Note: It is stated in question in part (b) to use Ending gross receivables for the purpose of getting Accounts receivables turnover ratio.

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