E9-9 Accounts receivable analysis Obj 2 Va. Accounts receivable turnover, Year 3
ID: 2589503 • Letter: E
Question
E9-9 Accounts receivable analysis Obj 2 Va. Accounts receivable turnover, Year 3 3.2 following data are taken from the financial statements of Amazing Technology Inc Terms The of all sales are 2/10, n/30 Year 3 Year 2 Year 1 Accounts receivable, end of year 350,000 290,000 $250,000 . For Years 2 and 3, determine () the accounts receivable turnover and (2) the number of b. What conclusions can be drawn from these data concerning accounts receivable and credit Net sales on account 4,224,000 3,456,000 days' sales in receivables. Round to nearest dollar and one decimal place. policies?Explanation / Answer
a) Year 2: Average accounts receivables = Year 1 accounts receivable + Year 2 accounts receivable/2 = $250000+$290000/2 = $270000
Accounts receivable turnover ratio = Net sales/Average accounts receivable
= $3456000/$270000
= 12.8x
Number of days sales in receivables = 365/Accounts receivable turnover ratio
= 365/12.8
= 28.5 days
Year 3: Average accounts receivables = Year 3 accounts receivable + Year 2 accounts receivable/2 = $350000+$290000/2 = $320000
Accounts receivable turnover ratio = Net sales/Average accounts receivable
= $4224000/$320000
= 13.2x
Number of days sales in receivables = 365/Accounts receivable turnover ratio
= 365/13.2
= 27.7 days
c) You may see that even though the accounts receivable turnover is more in Year 3, the number of days sales is lesser compared to Year 2 where number of days sales is more inspite of accounts receivable turnover ratio being less compared to Year 3.
This means that cash is being held up for more days from Year 3 with debtors taking more than the stipulated time to make payments. The company may consider revising the credit policies or accomodate better discount policy to encourage more debtors to pay the amount due
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