Compute (a) accounts receivable turnover and (b) days' sales uncollected.

Understand the Problem

The question is asking to calculate two financial metrics: accounts receivable turnover and days' sales uncollected based on provided company data. This involves using net sales and the average of beginning and ending accounts receivable balances to derive these figures.

Answer

Accounts Receivable Turnover: $6.5$, Days' Sales Uncollected: $34.5$

Steps to Solve

Calculate Average Accounts Receivable

To find the average accounts receivable, use the formula:

$$ \text{Average Accounts Receivable} = \frac{\text{Beginning Balance} + \text{Ending Balance}}{2} $$

Substituting the values:

$$ \text{Average Accounts Receivable} = \frac{18,000 + 8,000}{2} = \frac{26,000}{2} = 13,000 $$

Calculate Accounts Receivable Turnover

Now, use the average accounts receivable to compute the accounts receivable turnover with the formula:

$$ \text{Accounts Receivable Turnover} = \frac{\text{Net Sales}}{\text{Average Accounts Receivable}} $$

Substituting the values:

$$ \text{Accounts Receivable Turnover} = \frac{84,500}{13,000} \approx 6.5 $$

Calculate Days' Sales Uncollected

To find days' sales uncollected, use the formula:

$$ \text{Days' Sales Uncollected} = \frac{\text{Ending Accounts Receivable}}{\text{Daily Sales}} $$

First, calculate daily sales:

$$ \text{Daily Sales} = \frac{\text{Net Sales}}{365} = \frac{84,500}{365} \approx 231.51 $$

Then, substituting into the days' sales uncollected formula:

$$ \text{Days' Sales Uncollected} = \frac{8,000}{231.51} \approx 34.5 $$

Accounts Receivable Turnover: $6.5$
Days' Sales Uncollected: $34.5$

More Information

Accounts receivable turnover measures how effectively a company collects its receivables, while days' sales uncollected indicates how long it takes, on average, to collect payments. A higher turnover ratio typically indicates efficient collection processes.

Tips

Forgetting to calculate the average accounts receivable by taking both the beginning and ending balances into account.
Using total annual sales instead of daily sales when calculating days' sales uncollected.

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