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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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Chapter
Section
BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

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 websites. For two recent years, Best Buy reported the following (in millions):

  Year 2 Year1
Sales $39,528 $40,339
Accounts receivable at end of year 1,162 1,280

Assume that the accounts receivable (in millions) were $1,308 at the beginning of fiscal Year 1.

  1. 1. Compute the accounts receivable turnover for Year 2 and Year 1. Round to two decimal places.
  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.

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)=$39,528($1,162+$1,2802)=32.37times

Calculate accounts receivable turnover ratio for Year 1

(2)

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.

(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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