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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 turnover and days’ sales in receivables

American Eagle Outfitters, Inc. sells clothing, accessories, and personal care products for men and women through its retail stores. American Eagle reported the following data (in millions) for two recent years:

  Year 2 Year 1
Sales $3,522 $3,283
Accounts receivable 81 68

Assume that accounts receivable (in millions) were $74 million at the beginning of Year 1.

  1. a. Compute the accounts receivable turnover for Year 2 and Year 1. Round to two decimal places.
  2. b. Compute the day’s sales in receivables for Year 2 and Year 1. Use 365 days and round to one decimal place.
  3. c. What conclusions can be drawn from these analyses regarding American Eagle Outfitters’ efficiency in collecting receivables?

(a)

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.

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

Explanation

Calculate accounts receivable turnover ratio for Year 2.

Accountsreceivableturnover for Year 2}=SalesAverageaccountreceivable=Sales(Accountsreceivable, ending +Accountsreceivable, beginning2)=$3,522($81+$682)=47.28times

Calculate accounts receivable turnover ratio for Year 1

(b)

To determine

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 day’s sales in receivables at the end of Year 2 and Year 1.

(c)

To determine

To conclude: The Efficiency of Incorporation EO’s management in collecting accounts receivables.

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