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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

Financial statement data for years ending December 31 for Chiro-Solutions Company follow:

20Y2 20Y1
Sales $2,912,000 $2,958,000
Accounts receivable:
Beginning of year 300,000 280,000
End of year 340,000 300,000
  1. a. Determine the accounts receivable turnover for 20Y2 and 20Yl.
  2. b. Determine the days’ sales in receivables for 20Y2 and 20Yl. Use 365 days and round to one decimal place.
  3. c. Does the change in accounts receivable turnover and the days’ sales in receivables from 20Y1 to 20Y2 indicate a favorable or unfavorable change?

(a)

To determine

Accounts receivable turnover:

Accounts receivable turnover is a liquidity measure of accounts receivable in times, which is calculated by dividing the sales by the average amount of net accounts receivables. In other words, average receivable turnover ratio identifies the number of times the average amount of accounts receivables being collected during a particular period.

Days’ sales in receivables:

Days’ sales in receivables indicate the number of days taken by a business, to collect its outstanding amount of accounts receivable on an average. It is otherwise known as average collection period.

To calculate: Company CS’s accounts receivable turnover ratio for 20Y2 and 20Y1.

Explanation

Calculate Company CS’s accounts receivable turnover ratio for 20Y2.

Accounts receivableturnover}=SalesAverage accounts receivable=Sales(Accounts receivable at the beginning of the year+Accounts receivableat the end of the year2)=$2,914,000($300,000+$340,0002)=9.1 times

Hence, Company CS’s accounts receivable turnover ratio for 20Y2 is 9.1 times

(b)

To determine

To calculate: Company CS’s days’ sales in receivables for 20Y2 and 20Y1.

(c)

To determine

To identify: Whether the change in accounts receivable turnover and the day’s sales in receivables from 20Y1 to 20Y2 are favorable or unfavorable.

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