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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

The following data are taken from the financial statements of Sigmon Inc. Terms of all sales are 2/10, n/45.

  20Y3 20Y2 20Y1
Accounts receivable, end of year $ 725,000 $ 650,000 $600,000
Sales on account 5,637,500 4,687,500  

a. For 20Y2 and 20Y3, determine (l) the accounts receivable turnover and (2) the number of days’ sales in receivables. Round to the nearest dollar and one decimal place.

b. What conclusions can be drawn from these data concerning accounts receivable and credit 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: (1)Accounts receivable turnover ratio and (2) 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 20Y3

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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