Question

eBook Calculator Print Item Accounts Receivable Analysis Xavier Stores Company and Lestrade Stores Inc. are large retail department stores. Both companies offer credit to their customers through their own credit card operations. Information from the financial statements for both companies for two recent years is as follows (in millions): Xavier Lestrade 44,280 Sales $200,750 $281,050 Credit card receivables-beginning 23,381 57,514 Credit card receivables-ending 19,519 a. Determine the (1) accounts receivable turnover and (2) the number of days' sales in receivables for both companies. Round answers to one decima place. Assume 365 days a year. Xavier Lestrade days 1. Accounts receivable turnover < 2. Number of days' sales in receivables days b. Xavier's accounts receivable turnover is than Lestrade's. The number of days' sales in receivables is for Xavier than for Lestrade. These differences indicate that Xavier is able to turn over its receivables quickly than Lestrade. As a result, it takes Xavier time to collect its receivables.

Answer 1

To solve this question we need to follow the below mentioned steps & also please read remarks and explanations to get clear understanding of answer)

Step-1 Computation of Accounts Receivable Tumover Xavier Lestra de Accounts Receivable Turnover = Net Annual Credit Sales = ((Beginning Accounts Receivable + Ending Accounts Receivable)/2) Question Part A Net Annual Credit Sales (Given in Question) 5200,750 5281,050 (1) Credit Card Receivable - Beginning (Given in Question) $23.381 $57,514 Credit Card Receivable - Ending ( Given in Question) $19,519 544 280 5200750 = ((523381 + $19519)/2) 5281050 + ((557514 + 544280)/2) Accounts Receivable Tumover 9.4 Times 5.5 Times Step-2 Computation of No of Days Sales in Receivable 365 : Accounts Receivable Tumover 365 : Accounts Receivable Tum over Question Part A (2) No of Days in a year (A) (Given in Question) Accounts Receivable Turnover (B) (Calculated in A(1) 365 365 9.4 5.5 No of Days Sales in Receivable (C) = A/B 38.8 66.4 Remarks for Understanding So, the Xavier's accounts So, the Lestrade's accounts receivable turned over 9.4 times, receivable turned over 5.5 times, which means that the average which means that the average account receivable was collected account receivable was collected in in 38.8 days. 664 days. Step-3 Xavier's accounts receivable turnover is Higher then Lestrade's. The Number of day's sales in receivables is Lower for Xavier than for Lestrade. The differences indicate that xavier is able to turn over its receivable 27.5 Days i.e.(66.4 Days-38.8 Days) quickly than Lestrade. As a result, it takes Xavier 38.8 Days time to Collectits receivables Question Part B Explanation to Part B: General rule of thumb is that the higher the accounts receivable turnover the better. Higher ratio means Your collections methods are effective & Your customers are paying off debt quickly, freeing up credit lines for future purchases On the other hand if you have a low accounts receivable turnover, you're probably not effectively collecting debt payments with regard to your sales