The following information is taken from the financial statements of Columbia Hea

Question

The following information is taken from the financial statements of Columbia Health Care Inc.: Excerpts from Balance Sheets as of end of Year 3 Gross accounts receivable Allowance for doubtful accounts Net accounts receivable Year 2 Year 1 $36,944,000 $31,651,000 $30,476,000 Excerpts from Income Statements for the Years Ended Year 3 Year 2 Year 1 Sales Revenue (all credit) Bad Debt Expense Operating income before taxes $136,946,000 8,628,000 9,321,000 $137,002,000 136,354,000 5,846,000 (3,900,000) 8,148,000 1,048,000 Required: (1) Compute the following ratios a) Accounts receivable turnover ratio for Years 2 and 3 b) Allowance for doubtful accounts divided by accounts receivable at the end of Years 2 and 3

Explanation / Answer

Answer of Part 1:

Part a Year 2:

Average Accounts Receivable = (Opening net accounts receivable + closing net accounts receivable) /2
Average Accounts Receivable = ($25,451,000 + $26,696,000) / 2
Average Accounts Receivable = $26,073,500

Accounts Receivable Turnover = Sales / Average Accounts Receivable
Accounts Receivable Turnover = $136,354,000 / $26,073,500
Accounts Receivable Turnover = 5.23 times

Part a Year 3:

Average Accounts Receivable = (Opening net accounts receivable + closing net accounts receivable) /2
Average Accounts Receivable = ($26,696,000 + $33,019,000) / 2
Average Accounts Receivable = $29,857,500

Accounts Receivable Turnover = Sales / Average Accounts Receivable
Accounts Receivable Turnover = $137,002,000 / $29,857,500
Accounts Receivable Turnover = 4.59 times

Part B Year 2:

Allowance for doubtful ratio = Allowance for doubtful accounts / net accounts receivable
Allowance for doubtful ratio = $4,955,000 / $26,696,000
Allowance for doubtful ratio =0.19

Part b Year 3:

Allowance for doubtful ratio = Allowance for doubtful accounts / net accounts receivable
Allowance for doubtful ratio = $3,925,000 / $33,019,000
Allowance for doubtful ratio =0.12

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