Question

Simon Company's year-end balance sheets follow. Current Yr 1 Yr Ago 2 Yrs Ago At December 31 Assets Cash Accounts receivable, net Merchandise inventory Prepaid expenses Plant assets, net Total assets Liabilities and Equity Accounts payable Long-term notes payable secured by mortgages on plant assets Common stock, $10 par value Retained earnings Total liabilities and equity $ 31,800 89,500 112,500 10,799 278,500 $ 523,000 $ 35,625 $ 37,800 62,500 50,200 82,500 54,000 9,375 5,000 255,000 230, 500 $ 445,000 $ 377,500 $ 129,900 $ 75,250 $ 51, 250 98,500 163,500 131, 100 $ 523,000 101,500 83,500 163,500 163,500 104,750 79,250 $ 445,000 $ 377,500 The company's income statements for the Current Year and 1 Year Ago, follow. Assume that all sales are on credit: For Year Ended December 31 Sales Cost of goods sold Other operating expenses Interest expense Income tax expense Total costs and expenses Current Yr $673,500 $ 411,225 209,550 12,100 9.525 642.400 1 Yr Ago $ 532,000 $ 345,500 134,980 13,300 8,845 502,625 < Drou

Answer 1

Answer 2A)

Calculation of accounts receivable turnover ratio

Accounts Receivable Turnover
	Choose Numerator:	/	Choose Denominator:	=	Accounts Receivable Turnover
	Net Credit Sales	/	Average Accounts Receivable	=	Accounts Receivable Turnover
Current Year:	$                    6,73,500	/	$                                             76,000	=	8.86	times
1 year ago :	$                    5,32,000	/	$                                             56,350	=	9.44	times

Working Note:

Calculation of average accounts receivable 1 year ago:

Average account receivable 1 year ago= (Beginning balance of accounts receivable 1 year ago + Ending balance of accounts receivable 1 year ago)/ 2

                                                                              = ($ 50,200 + $ 62,500)/ 2

                                                                                = $ 56,350

Calculation of average accounts receivable in current year:

Average account receivable in current year = (Beginning balance of accounts receivable in current year + Ending balance of accounts receivable in current year)/ 2

                                                                              = ($ 62,500 + $ 89,500)/ 2

                                                                                = $ 76,000

Answer 2B)

Accounts receivable turnover ratio is a measure of how effectively the company is able to make collection from its account receivable for sales made on account. This ratio (calculated in times) indicates the number of times money is collected for sales made during a particular year. The higher the ratio the better it is as it indicates that collection is being made more frequently against sales on account and thus there is a shorter collection period.

In the given question, the accounts receivable turnover ratio has dipped from 9.44 times a year ago to 8.86 times in the current year indicating that the ratio has WORSENED in the current year vis-a-vis a year ago.