Based on the following data and using a 365-day year: 12/31/Year 1 accounts receivable $100,000
12/31/Year 2 accounts receivable 70,000
For the year ended 12/31/Year 1, sales 1,050,000
For the year ended 12/31/Year 2, sales 1,200,000
A. Compute the accounts receivable turnover.
B. Compute the number of days' sales in receivables for year.
C. The industry average turnover is 20 times during the year, and the number of days' sales in receivables averages 25. How does this situation compare to the industry average?
D. Is it slightly better or slightly worse than the average?

A. 14 times

B. 21 days

C. For accounts receivable turnover, the computed 14 days is less than the industry average of 20. For the the number of days' sales in receivables, the computed 21 days is less than the industry average of 25.

D. It is slightly better than the average

Explanation:

Note that the relevant year this question is related is Year 2 which is the latest year. The questions are therefore answer as follows:

A. Compute the accounts receivable turnover.

Average accounts receivable = (12/31/Year 1 accounts receivable + 12/31/Year 2 accounts receivable) / 2 = $100,000 + $70,000 = $85,000

Accounts receivable turnover = Year 2 Sales /  Average accounts receivable = $1,200,000 / $85,000 = 14.12, or approximately 14 times

B. Compute the number of days' sales in receivables for year.

Number of days' sales in receivables for year 2 = (Year 2 accounts receivable / Year 2 Sales) * 365 = ($70,000 / $1,200,000) * 365 = 21.29, or approximately 21 days

C. The industry average turnover is 20 times during the year, and the number of days' sales in receivables averages 25. How does this situation compare to the industry average?

The computed accounts receivable turnover of 14 times is less than the industry average turnover of 20 times.

Also, the computed number of days' sales in receivables for year 2 of 21 days is less than the industry average number of days' sales in receivables of 25 days.

D. Is it slightly better or slightly worse than the average?

For accounts receivable turnover, it is slightly better than average as the computed one indicates that the business can 14 times turn its accounts receivable into cash during the year as against 20 times industry average which is higher.

Also for the number of days' sales in receivables for year, it is slightly better than average as the computed one indicates that it takes the business just 21 days  to collect cash from his customers on average as against the 25 days industry average which is higher.

Both therefore indicates that It is slightly better than the average.

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