# Accounts receivable analysis The following data are taken from the financial statements of Sigmon Inc. Terms of all sales are 2/10, n/45. a. For 20Y2 and 20Y3, determine (1) 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?

### Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124

Chapter
Section

### Financial Accounting

15th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781337272124
Chapter 17, Problem 9E
Textbook Problem
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## Accounts receivable analysisThe following data are taken from the financial statements of Sigmon Inc. Terms of all sales are 2/10, n/45. a. For 20Y2 and 20Y3, determine (1) 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

Compute: (1) Accounts receivable turnover ratio and (2) number of days’ sales in receivables

### Explanation of Solution

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

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 collection period is used to determine the number of days a particular company takes to collect accounts receivables.

Formula:

Number of days’ sales in receivable=Average accounts receivable Average daily sales

(1)

Compute accounts receivable turnover ratio for 20Y3.

Accounts receivables turnover ratio}=Net credit salesAverage accounts receivables=$5,637,500$687,500=8.2

Compute accounts receivable turnover ratio for 20Y2.

Accounts receivables turnover ratio}=Net credit salesAverage accounts receivables=$4,687,500$625,000=7.5

Working notes:

Average accounts receivables are determined as below:

Average accounts receivables for 20Y3

Average accounts receivables = (Opening accounts receivables + Closing accounts receivables2)=$725,000+$650,0002=\$687,5

(b)

To determine

Provide conclusion about accounts receivables and credit policies.

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