Question

he following information is from the annual financial statements of raheem company. year 3 year 2 year 1 net sales $ 439,000 $ 370,000 $ 423,000 accounts receivable, net (year-end) 31,100 28,900 25,600 (1) compute its accounts receivable turnover for year 2 and year 3. (2) assuming its competitor has a turnover of 21.9, is raheem performing better or worse at collecting receivables than its competitor?

Answer 1

Raheem Company's accounts receivable turnovers for Year 2 and Year 3 are 13.58 times and 14.63 times, respectively. These figures are calculated using the respective net sales and average accounts receivable. Compared to a competitor's turnover of 21.9, Raheem is worse at collecting receivables.

Computing Accounts Receivable Turnover

To compute the accounts receivable turnover for a company, the formula is:

Accounts Receivable Turnover = Net Sales / Average Accounts Receivable.

For Raheem Company, the turnover for Year 2 would be: Year 2 Turnover = $370,000 / (($28,900 + $25,600) / 2) = $370,000 / $27,250 = 13.58 times.

The turnover for Year 3 would be: Year 3 Turnover = $439,000 / (($31,100 + $28,900) / 2) = $439,000 / $30,000 = 14.63 times.

Comparison with Competitor's Turnover

To determine if Raheem is performing better at collecting receivables compared to its competitor with a turnover of 21.9, we can see that Raheem's turnovers for Year 2 and Year 3 are lower.

A higher receivable turnover indicates a more efficient collection process.

Therefore, Raheem is performing worse at collecting receivables than its competitor.