Question

The following data are taken from the financial statements of Sigmon Inc. Terms of all sales are 2/10, n/45. The reporting statement of a company is shown. A table with four columns is shown. The first column has no heading; the second columns heading is 20Y3; the third column heading is 20Y2; the third column heading is 20Y1. The headings, 20Y3, 20Y2 and 20Y1 are set in bold. The transactions listed are as follows: Accounts receivable, end of year is $ 725,000; $ 650,000 and $ 600,000; account are 5,637,500 and 4,687,500. For 20Y2 and 20Y3, determine (1) the accounts receivable turnover and (2) the number of days' sales in receivables. Round to the nearest dollar and one decimal place. Answer Check Figure: Accounts receivable turnover, 20Y3, 8.2 Pencil What conclusions can be drawn from these data concerning accounts receivable and credit policies

Answer 1

Answer: For 20Y3 --8.2 times, 44.5 days

For 20Y2----7.5 times 48.7 days

Explanation:  

                                                        20Y3                 20Y2     20Y1

Accounts receivable, end of years $ 725,000; $ 650,000 $ 600,000'

  Sales on account                           5,637,500  4,687,500

For 20Y3 --

Accounts receivable turnover = Net credit Sales / Average Account receivable

Net Credit sales= $5,637,500

Average Account receivable

=(End of years of yr2 and 3)/ 2=($ 725,000 +$ 650,000) /2 = $1.375,000/2= $687, 500

Accounts receivable turnover = $5,637,500/ $687,500=8.2 times

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

 = 365/8.2 = 44.5 days

For 20Y2

Accounts receivable turnover = Net credit Sales / Average Account receivable

Net Credit sales= $4,687,500

Average Account receivable

=(End of years of yr2 and 1)/2 = ($ 650,000 + $ 600,000') /2 = $/2= $625,000

Accounts receivable turnover = $4,687,500/ $625,000=7.5 times

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

 = 365/7.5=  48.7 days

b. Accounts receivable in cash owed by clients to a company from the invoices the company sent to them

Also, Credit policy is a requirement that establishes the payment terms of a company to its clients so as to eliminate the risk of loss. The credit policy differs  and from company and comprises of the payment terms( the duration of time) or credit period, collections, discounts and operational standard

---->The relationship between  credit policy and account receivables is that  is that when a company  establishes that  payment terms  are increased and  on credit, the accounts receivables increases reducing a company''s finance. A company that establishes a decrease in the  credit period duration will have a reduced account receivable providing fast financial returns to the company.

From the results obtained from 20Y3 and 20Y2, We will see that

Particulars    20Y3           20Y2                   Remark  

Aturnover ratio 8.2times 7.5 times  Increase by 0.7 times

Number of days sales

in receiviable  44.5 days   48.7days Decrease by 4.2 days

In year 20Y3, THE  higher ratio of accounts receivable turnover shows that cash for sales will more likely to be collected than a 20Y2 with a lower ratio  of accounts receivable turnover.