Question

1. The following data are taken from or calculated from the financial statements:
   

   	Current Year	Preceding Year
   Average accounts receivable (net)	$123,000	$95,000
   Sales on account	950,000	825,000

   a. Assuming that credit terms on all sales are n/45, determine for each year (1) the accounts receivable turnover and (2) the number of days' sales in receivables. Round intermediate calculations to whole numbers and final answers to two decimal places.

   1. The accounts receivable turnover:

   Current Year

   Preceding Year

   2. The number of days' sales in receivables: Assume a 365-day year.

   Current Year
   days

   Preceding Year
   days

   b. Comment on any significant trends revealed by the data.

   Sales   during the current year, indicating a(n)   trend. The accounts receivable turnover has  . Based on credit terms of n/45, the current year turnover indicates that   receivables are not being collected within the 45-day period. Likewise, the number of days' sales in receivables indicates a(n)   trend.

Answer 1

a)

1)

Accounts receivable turnover = Net Credit sales / Average accounts receivable

Current year = 950,000 / 123,000 = 7.72 (Approximately)

Preceding year = 825,000 / 95,000 = 8.68 (Approximately)

2)

The number of days sales in receivables = (Accounts receivable / Total credit sales) * No. of days in a year

Current year = (123,000 / 950,000) * 365 = 47.25 (or) 47 days

Preceding year = (95,000 / 825,000) * 365 = 42.03 (or) 42 days

b)

Sales INCREASED during the current year.

The accounts receivable turnover indicates a FAVOURABLE trend.

Based on credit terms of n/45, the current year turnover indicates that some receivables are not being collected within the 45-day period. (Since, number of days sales in receivables for current year is greater than 45 days)

The number of days' sales in receivables indicates UNFAVOURABLE trend. (Since, increased to 47 days from 42 days)