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   than Lestrade's. The number of days' sales in receivables is   for Xavier than for Lestrade. These differences indicate that Xavier is able to turn over its receivables   quickly than Lestrade. As a result, it takes Xavier   time to collect its receivables.

Answer 1

a.

(1)

Accounts receivable turnover = Sales / Average Accounts receivable

	Xavier	Lestrade
Accounts receivable turnover	10 times [$8,500,000/($820,000+$880,000)/2]	7 times [$4,585,000/($600,000+$710,000)/2]

(2)

Number of days in receivables = 365 / Accounts receivable turnover

	Xavier	Lestrade
Number of days in receivables	37 days (365/10)	52 days (365/7)

b.

Xavier's accounts receivable turnover is much more than Lestrade's. The number of days' sales in receivables is less 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 37 days time to collect its receivables