Question

Classic Company designs, markets, and distributes a variety of apparel, home decor, accessory, and fragrance products. The company's products include such brands as Classic Company, Polo by Classic Company, and Chaps. For two recent years, the company reported the following (in millions):
Year 2 Year 1
Sales $3,027,675 $3,022,930
Accounts receivable (end of year) 375,950 390,550
The accounts recelvable at the beginning of Year 1 was $346,750
Required:
a. Compute the accounts recelvable turnover for Year 1 and Year 2. Round to one decimal place.
b. Compute the number of days' sales in recelvables for Year 1 and Year 2. Round to one decimal place. Use 365 days per year in your calculations.

Answer 1

Answer:

a.

Accounts receivable turnover for Year 1: 8.2 times

Accounts receivable turnover for Year 2: 7.9 times

b.

The number of days' sales in receivables for year 1: 44.5 days

The number of days' sales in receivables for year 2: 46.2 days

Explanation:

a. The accounts receivable turnover is an efficiency ratio that measures how many times a company can collect its receivables or money owed by clients during the year.

Accounts receivable turnover is calculated by following formula:

Accounts Receivable Turnover = Net Credit Sales /Average Accounts Receivable

In there:

Average Accounts Receivable = (The beginning accounts receivable of the period balance + The ending accounts receivable of the period balance)/2

In Classic Company:

Average Accounts Receivable in year 1 = ($346,750+$390,550)/2 = $368,650

Average Accounts Receivable in year 2 = ($390,550+$375,950)/2=$383,250

Accounts receivable turnover for Year 1 = $3,022,930/$368,650=8.2 times

Accounts receivable turnover for Year 2 = $3,027,675/$383,250=7.9 times

b.

The number of days' sales in receivables = 365/Accounts receivable turnover ratio

For Year 1:

The number of days' sales in receivables = 365/8.2 = 44.5 days

For year 2:

The number of days' sales in receivables = 365/7.9 = 46.2 days