Question

Accounts Receivable Analysis

Xavier Stores Company and Lestrade Stores Inc. are large retail department stores. Both companies offer credit to their customers through their own credit card operations. Information from the financial statements for both companies for two recent years is as follows (in millions):

Xavier Lestrade
Sales $8,500,000 $4,585,000
Credit card receivables—beginning 820,000 600,000
Credit card receviables—ending 880,000 710,000

a. Determine the (1) accounts receivable turnover and (2) the number of days' sales in receivables for both companies. Round your calculations and answers to one decimal place. Assume 365 days a year.

Xavier Lestrade
1. Accounts receivable turnover
2. Number of days' sales in receivables days days

b. Xavier's accounts receivable turnover is much higher  than Lestrade's. The number of days' sales in receivables is lower  for Xavier than for Lestrade. These differences indicate that Xavier is able to turn over its receivables more  quickly than Lestrade. As a result, it takes Xavier less  time to collect its receivables.

Answer 1

SOLUTION

Xavier

Accounts receivables turnover = Net credit sales / Average accounts receivable

= $8,500,000 / 850,000

= 10 times

Average accounts receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2

= (820,000+880,000) / 2 = $850,000

Number of days' sales in receivables = 365 / Accounts receivables turnover

= 365 / 10 = 36.5 days

Lestrade

Accounts receivables turnover = Net credit sales / Average accounts receivable

= $4,585,000 / 655,000

= 7 times

Average accounts receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2

= (600,000+710,000) / 2 = $655,000

Number of days' sales in receivables = 365 / Accounts receivables turnover

= 365 / 7 = 52.1 days