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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Accounts receivable analysis

Xavier Scores Company and Lestrade Stores Inc. are large retail department stores. Both companies offer credit to their customers through their own credit card operations. Information from the financial statements for both companies for two recent years is as follows (in millions):

  Xavier Lestrade
Sales $8,500,000 $4,585,000
Credit card receivables—beginning 820,000 600,000
Credit card receivables—ending 880,000 710,000

a. Determine the (1) accounts receivable turnover and (2) the number of days’ sales in receivables for both companies. Round to one decimal place.

b. Compare the two companies with regard to their credit card policies.

a)

To determine

Financial Ratios: Financial ratios are the metrics used to evaluate the liquidity, capabilities, profitability, and overall performance of a company.

To compute: Accounts receivable turnover ratio and number of days’ sales in receivables

Given info: Sales and average accounts receivable.

Explanation

Accounts receivables turnover ratio is mainly used to evaluate the collection process efficiency. It helps the company to know the number of times the accounts receivable is collected in a particular time period. Main purpose of accounts receivable turnover ratio is to manage the working capital of the company. This ratio is determined by dividing credit sales and sales return.

Formula:

Accounts receivables turnover ratio}=Net credit salesAverage accounts receivables

Average accounts receivables are determined as below:

Average accounts receivables for X

Average accounts receivables = (Opening accounts receivables + Closing accounts receivables

b)

To determine

To provide: Conclusion about accounts receivables and credit policies.

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