The following data are taken from the financial statements of Tall Tail Company.
ID: 2377271 • Letter: T
Question
The following data are taken from the financial statements of Tall Tail Company.
2007 2006
Accounts receivable (net), end of year $ 560,000 $ 540,000
Net sales on account 4,700,000 4,000,000
Terms for all sales are 1/10, n/45.
At the end of 2005, accounts receivable was $500,000.
Instructions
Compute for each year
(a) the receivables turnover ratio and (b) the average collection period.
What conclusions about the management of accounts receivable can be drawn from these data?
Explanation / Answer
(a) the receivables turnover ratio
2012:
Receivables turnover ratio = Net credit sales / Average net receivables
$4,400,000 / 550,000* = 8 times
*(560,000 + 540,000) / 2 = $550,000)
2011:
4,000,000 / 520,000** = 7.7 times
** ($500,000 + 540,000) / 2 = $520,000
(b) the average collection period. At the end of 2010,
2012:
365 / 8 = 45.63 days
2011:
365 / 7.7 = 47.40 days
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