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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

Costco Wholesale Corporation operates membership warehouses that sell a variety of branded and private label products. Headquartered in Issaquah, Washington, it also sells merchandise online in the United States (Costco.com) and in Canada (Costco.ca). For two recent years, Costco reported the following (in millions):

  Year2 Year1
Sales $116,199 $112,640
Accounts receivable at end of year 1,972 1,817

Assume that the accounts receivable (in thousands) were $1,822 at the beginning of 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 Costco’s efficiency in collecting receivables?
  4. 4. Given the nature of Costco’s operations, do you believe Costco’s accounts receivable turnover ratio would be higher or lower than a typical manufacturing company such as the Campbell Soup Company? Explain.

(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)=$116,199($1,972+$1,8172)=61.33times

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 Corporation C’s management in collecting accounts receivables.

(4)

To determine

To ascertain: Whether Corporation C’s accounts receivable turnover ratio would be higher or lower than a typical manufacturing company.

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