If the average accounts receivable turnover in AAC\'s industry is 6, which of th

Question

If the average accounts receivable turnover in AAC's industry is 6, which of the following is the most correct?

AAC manages its accounts receivables better than the industry because its receivable turnover is higher.

AAC manages its accounts receivables worse than the industry because its receivable turnover is higher.

AAC manages its accounts receivables better than the industry because its receivable turnover is lower.

AAC manages its accounts receivables worse than the industry because its receivable turnover is lower.

AboveAverage Corporation (AAC) Balance Sheet 2014 2013 Assets Current assets:    Cash $3,916,040 $4,386,040 Marketable securities $2,525,000 $1,875,000    Accounts receivable, net 3,249,500 $3,055,500    Inventories 2,990,000 3,040,000         Total current assets 12,680,540 $12,356,540 Net Fixed assets 2,225,500 $2,000,000 Non-amortizable intangible assets 125,000 $90,000         Total assets $15,031,040 $14,446,540 Liabilities and Stockholders’ Equity Current Liabilities:    Notes Payable due within one year $1,000,000 $1,000,000    Accounts payable and accrued liabilities 2,221,000 $2,091,500    Federal income taxes payable 130,000 $300,000         Total current liabilities 3,351,000 $3,391,500 Notes payable due after one year 2,000,000 $3,000,000 Long-term bonds 1,500,000 $2,465,000 Stockholders’ equity:    Preferred stock 240,000 $240,000    Capital stock 1,000,000 $600,000    Additional paid-in capital 4,000,000 $2,400,000    Retained earnings 2,940,040 $2,350,040         Total stockholders’ equity 8,180,040 $5,590,040         Total liabilities and stockholders’ equity $15,031,040 $14,446,540

Explanation / Answer

Average Accounts Receivable Turnover Ratio= Net Annual Credit Sales/ (Beginning Accounts Receivables+Ending Accounts Receivables)/2

So, for AAC its Accounts Receivable Turnover ratio= 15,650,000/(3,055,500+3,249,500)/2

=15650000/3152500

=4.9644

Assuming, all sales are credit sales.

Now, industry average is 10 whereas for AAC it is 4.96 days.

High ratio indicates restrictive policy where less credit is offered or high ratio indicates that more credit term is allowed for payment.

AAC manages its accounts receivables better than the industry because its receivable turnover is lower.Because, low credit period is offered so more time sales are completed.

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