Accounts Receivable Turnover and Days\' Sales in Receivables For two recent year

Question

Accounts Receivable Turnover and Days' Sales in Receivables

For two recent years, Rosco Co. reported the following:

Assume that the accounts receivable were $401,500 at the beginning of Year 1.

a. Compute the accounts receivable turnover for Year 2 and Year 1. Round to one decimal place.

b. Compute the days' sales in receivables at the end of Year 2 and Year 1. Use 365 days per year in your calculations. Round to one decimal place.

c. The change in the accounts receivable turnover from year 1 to year 2 indicates a(n) decrease  in the efficiency of collecting accounts receivable and is a(n) unfavorable  trend. The change in the days' sales in receivables indicates a(n) unfavorable  trend.

Explanation / Answer

Here average account receivable for year 2 = (481,800+474,500)/2 = $ 478150.0

And average account recivable for year 1 = (474,500+401500)/2 = $438000

So account receivble turnover for year 2 = 4351165/478150 = 9.1

and account receivable turnover for year 1 = 4117200/438000=9.4

This is the answer of part a

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Now average daily sale for year 2 = 4351165/365 = $11921

And average daily sale for year 1 = 4117200/365 = $11280

Thus days sales receivable for year 2 = 478150/11921= 40.1

and day`s sales receivable for year 1= 438000/11280 = 38.8

This is the answer of part (b)

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The accounts recivable turnover shows that efficiency of collecting account receivable is decreasing from 9.4 to 9.1 that is an unfavorable trend. The day`s sales for both years also shows an increase in efficiency of collecting received accounts to be increased from 38.8 to 40.1 that is favorable tread. But final decision will be based on the industry averages and similar firms.

This is the answer of part (c)

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