Accounts Receivable Turnover and Number of Days' Sales in Receivables
Financial statement data for years ending December 31 for Blum Company are shown below.
2016 | 2015 | |||
Sales | $5,794,740 | $5,432,660 | ||
Accounts receivable: | ||||
Beginning of year | 423,110 | 474,240 | ||
End of year | 496,690 | 416,360 |
a. Determine the accounts receivable turnover for 2016 and 2015. Round your answers to one decimal place.
Accounts Receivable Turnover | |
2016 | |
2015 |
b. Determine the number of days' sales in receivables for 2016 and 2015. Use 365 days in a year in your computations. Round interim calculations and your final answers to one decimal place.
Number of Days' Sales in Receivables | |
2016 | days |
2015 | days |
c. Does the change in accounts receivable
turnover and the number of days' sales in receivables from 2015 to
2016 indicate a favorable or an unfavorable trend?
a) Accounts Receivable Turnover
Accounts Receivable Turnover measures the company's ability to convert its debtors into cash.
Accounts Receivable Turnover (ART) = Net Credit Sales / Average accounts receivables
ART (2015) = $54,32,660 / ($474,240 + $416,360)/2
= 12.2
ART (2016) = $ 57,94,740 / ($423,110 + $ 496,690)/2
= 12.6
b) No.of days sales in receivables
Days sales outstanding is the no.of days the company has taken to convert its accounts receivable.
DSO = 365 days / Accounts Receivable Turnover
DSO (2015) = 365 / 12.2 = 29.92 days
DSO (2016) = 365 / 12.6 = 28.97 days
c) The accounts receivable turnover has improved in 2016 compared to 2015. The days sales in receivables has been reduced. This indicates that the receivables are collected faster than the previous year. Hence, there is an improvement and it indicates a favourable trend.
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