Question

If sales returns and allowances are routinely high relative to total sales, what could this be an indication of? Explain!

A high ratio of the allowance for uncollectible accounts to total accounts receivable could be an indication of what? Explain!

A high receivables turnover ratio (or low average collection period) generally indicates what? Explain!

Answer 1

Question 1. If sales returns and allowances are routinely high relative to total sales, what could this be an indication of? Explain!

Answer 1. In case, where sales returns and allowances are routinely high relative to total sales this indicates that the company is producing such products which the customers do not appreciate much and sales are mostly made on return basis. This is not going to profit the company at all.

Question 2. A high ratio of the allowance for uncollectible accounts to total accounts receivable could be an indication of what? Explain!

Answer 2. This could be an indication of that the company wants to collect its receivables at all costs and as early as possible. Another thing is that excerising this practice would incurre much more expenses than usual.

Question 3. A high receivables turnover ratio (or low average collection period) generally indicates what? Explain!

Answer 3. It means that the company is strictly following its collection policies and have less floatation costs in form of receivables. High receivables turnover ratio (or low average collection period) generally indicates that the company have less current assets in form of receivables and such amounts are more in form of cash or bank balance.