Question

Classic Company designs, markets, and distributes a variety of apparel, home decor, accessory, and fragrance products. The company’s products include such brands as Polo by Classic, Classic Purple Label, Classic, Polo Jeans Co., and Chaps. Polo Classic reported the following for two recent years:

For the Period Ending
Year 2 Year 1
Sales 6,859,5000 5,660,300
Accounts receivable 690,000 592,700
Assume that the accounts receivable (in millions) were $486,200 at the beginning of year 1.
a. Compute the accounts receivable turnover for year 2 and year 1. Round to one decimal place.b. Compute the days’ sales in receivables for year 2 and year 1. Use 365 days and round to one decimal place.c. What conclusions can be drawn from these analyses regarding Classic company’s efficiency in collecting receivables?

Answer 1

a. Accounts Receivables Turnover

Year 1 = 10.5

Year 2 = 10.7

b. Day's Sales in Receivables

Year 1 = 34.8 days

Year 2 = 34.1 days

c. From the above it can be concluded that the company has increased efficiency to collect debtors from year 1 where it was approximately 35 days and in year 2 it is 34 days.

Therefore the efficiency has increased.

Step-by-step explanation:

Accounts Receivables Turnover = Net Credit Sales/Average Receivables

Since not provided which portion is credit sales let total sales be credit sales.

For Year 1

We have Credit Sales = $5,660,300

Average Receivables = (Opening + Closing)/2

Opening = $486,200

Closing = $592,700

Total = $1,078,900

Average = $1,078,900/2 = $539,450

Accounts Receivables Turnover = $5,660,300/$539,450 = 10.5

Similarly for Year 2

Credit Sales = $6,859,500

Opening Receivables = $592,700

Closing Receivables = $690,000

Total = 1,282,700

Average = $1,282,700/2 = $641,350

Accounts Receivables Turnover = $6,859,500/$641,350 = 10.7

Days Sales in receivables = Average Receivables / Sales per day

Year 1 Sales Per Day = $5,660,300/365 = $15,507.67

Days Sales in receivables Year 1 = $539,450/$15,507.67 = 34.8 days

Year 2 Sales Per Day = $6,859,500/365 = $18,793.15

Days Sales in receivables Year 1 = $641,350/$18,793.15 = 34.1 days

a. Accounts Receivables Turnover

Year 1 = 10.5

Year 2 = 10.7

b. Day's Sales in Receivables

Year 1 = 34.8 days

Year 2 = 34.1 days

c. From the above it can be concluded that the company has increased efficiency to collect debtors from year 1 where it was approximately 35 days and in year 2 it is 34 days.

Therefore the efficiency has increased.