Question

The financial statements of Minnesota Mining and Manufacturing Company (3M) report net sales of $20.0 billion. Accounts receivable (net) are $2.7 billion at the beginning of the year and $2.8 billion at the end of the year.
1. Compute 3M's account receivable turnover.
2. Compute 3M's average collection period for accounts receivable in days.

Answer 1

Answer:

Explanation:

Given:

Net sales: $20.0 billion.

Accounts receivable:

• The beginning of the year: $2.7 billion

• The end of the year $2.8 billion  

a. Compute 3M's account receivable turnover.

We need to find the average account receivable:

= (the beginning account receivable + the ending account receivable) / 2

= ($2.7 billion + $2.8 billion) / 2

= $5.5 billion / 2

= $2.74 billion

• Accounts Receivable turnover ratio:  

= Net annual credit sale ÷ Average accounts receivable

= $20.0 billion: $2.74 billion

= 7.3 time.

• 3M's average collection period for accounts receivable in days

= 365/Accounts Receivable turnover ratio:

= 365/7.3

= 50 days.

Answer 2

Answer:

1. 7.27 times

2. 50.19 days

Explanation:

The receivables turnover is the ration of net sales to average accounts receivable. The average accounts receivable is the sum of the receivables at the beginning of the period and that at the end of the period divided by 2.

The average collection period is the ratio of the total number of days in the period to the receivables turnover ratio measured in days.

Account receivable turnover = net sales/average accounts receivable

average accounts receivable =  (beginning balance + ending balance)/2

Collection period for Accounts receivable in days = 365/Account receivable turnover

Account receivable turnover = 20/(2.7 + 2.8)/2

= 40/5.5

= 7.27 times

Collection period for  Accounts receivable in days =  365/7.27

= 50.19 days