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Accounts receivable turnover and days’ sales in receivables Best Buy is a specialty retailer of consumer electronics, including personal computers, entertainment software, and appliances. Best Buy operates retail stores in addition to the Best Buy, Media Play, On Cue, and Magnolia Hi-Fi Web sites. For two recent years, Best Buy reported the following (in millions): Year 2 Year 1 Sales $50,705 $49,747 Accounts receivable at end of year 2,288 2,348 Assume that the accounts receivable (in millions) were $2,020 at the beginning of fiscal Year 1. 1. Compute the accounts receivable turnover for Year 2 and Year 1, Round to one decimal place. 2. Compute the days’ sales in receivables at the end of Year 2 and Year 1. Use 365 days and round to one decimal place. 3. What conclusions can be drawn from (1) and (2) regarding Best Buy's efficiency in collecting receivables? 4. What assumption did we make about sales for the Best Buy ratio computations that might distort the ratios and therefore cause the ratios not to be comparable for year 2 and Year 1?

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Financial & Managerial Accounting

13th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781285866307

Solutions

Chapter
Section
BuyFindarrow_forward

Financial & Managerial Accounting

13th Edition
Carl Warren + 2 others
Publisher: Cengage Learning
ISBN: 9781285866307
Chapter 8, Problem 8.3CP
Textbook Problem
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Accounts receivable turnover and days’ sales in receivables

Best Buy is a specialty retailer of consumer electronics, including personal computers, entertainment software, and appliances. Best Buy operates retail stores in addition to the Best Buy, Media Play, On Cue, and Magnolia Hi-Fi Web sites. For two recent years, Best Buy reported the following (in millions):

  Year 2 Year 1
Sales $50,705 $49,747
Accounts receivable at end of year 2,288 2,348

Assume that the accounts receivable (in millions) were $2,020 at the beginning of fiscal Year 1.

  1. 1. Compute the accounts receivable turnover for Year 2 and Year 1, Round to one decimal place.
  2. 2. Compute the days’ sales in receivables at the end of Year 2 and Year 1. Use 365 days and round to one decimal place.
  3. 3. What conclusions can be drawn from (1) and (2) regarding Best Buy's efficiency in collecting receivables?
  4. 4. What assumption did we make about sales for the Best Buy ratio computations that might distort the ratios and therefore cause the ratios not to be comparable for year 2 and Year 1?

(1)

To determine

Accounts receivable turnover

Accounts receivable turnover is a liquidity measure of accounts receivable in times, which is calculated by dividing the net credit sales by the average amount of net accounts receivables. In simple, it indicates the number of times the average amount of net accounts receivables has been collected during a particular period.

Average collection period:

Average collection period indicates the number of days taken by a business to collect its outstanding amount of accounts receivable on an average.

To calculate: The accounts receivable turnover for Year 2 and Year 1.

Explanation of Solution

Calculate accounts receivable turnover ratio for Year 2.

Accountsreceivableturnover for Year 2}=SalesAverageaccountreceivable=Sales(Accountsreceivable, ending +Accountsreceivable, beginning2)=$50,705($2,288+$2,3482)=21.9times

Calculate accounts receivable turnover ratio for Year 1

(2)

To determine

To calculate: The day’s sales in receivables at the end of Year 2 and Year 1.

(3)

To determine

To conclude: The Efficiency of Company B’s management in collecting accounts receivables.

(4)

To determine

The assumption about sales that might distort the ratios and makes the ratios not to be comparable for Year 2 and Year 1.

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Chapter 8 Solutions

Financial & Managerial Accounting
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