Question

Analyze L Brands L Brands, Inc. (LB) sells women's clothing and personal health care products through specialty retail stores including Victoria's Secret and Bath & Body Works stores. L Brands reported the following in millions) for two recent years: Year 2 Year 1 Sales $12,154 $11,454 Accounts receivable: 252 244 Beginning of year End of year 261 252 a. Determine the accounts receivable turnover for Year 1 and Year 2. Round all calculations to one decimal place. Year 1 Year 2 Accounts receivable turnover 7.6 x b. Compute the number of days' sales in receivables for Year 1 and Year 2. Use 365 days and round all calculations to one decimal place. Year 1 Year 2 Number of days' sales in receivables 7.5 X days days c. With regard to accounts receivable turnover, which of the following statements is correct? 1. A decline in the accounts receivable turnover means there is a decline in the efficiency in collecting accounts receivable. 2. An increase in the accounts receivable turnover means there is a decline in the efficiency in collecting accounts receivable. 3. An increase in the accounts receivable turnover means there is a decline in the efficiency in making sales. 4. An increase in the accounts receivable turnover means there is a increase in the efficiency in making sales. 1

Answer 1

The accounts receivable turnover for L Brands Inc. in Year 1 is 46.2 times and for Year 2 is 47.4 times. The number of days' sales in receivables for Year 1 is 7.9 days, and for Year 2, it is 7.7 days. The correct statement regarding the efficiency of collecting accounts receivable is that a decline in turnover indicates a decline in collection efficiency.

Step-by-step explanation:

The accounts receivable turnover is a measure of how many times a company collects its average accounts receivable in one year. It is calculated by dividing the total net credit sales by the average accounts receivable for the period.

Accounts Receivable Turnover Calculation for Year 1 and Year 2:

1. Average accounts receivable for Year 1 = (Beginning + End of Year) / 2 = (244 + 252) / 2 = 248 million.
   
2. Accounts receivable turnover for Year 1 = Net credit sales / Average accounts receivable = $11,454 million / $248 million = 46.2 times.
   
3. Average accounts receivable for Year 2 = (Beginning + End of Year) / 2 = (252 + 261) / 2 = 256.5 million.
   
4. Accounts receivable turnover for Year 2 = Net credit sales / Average accounts receivable = $12,154 million / $256.5 million = 47.4 times.

The number of days' sales in receivables is a measure of the average time it takes for a company to collect receivables from its credit sales. It is calculated by dividing 365 days by the accounts receivable turnover ratio.

Number of Days' Sales in Receivables Calculation for Year 1 and Year 2:

1. Number of days' sales in receivables for Year 1 = 365 days / Accounts receivable turnover = 365 / 46.2 = 7.9 days.
   
2. Number of days' sales in receivables for Year 2 = 365 days / Accounts receivable turnover = 365 / 47.4 = 7.7 days.

Regarding statement c, the correct statement is:

• 1. A decline in the accounts receivable turnover means there is a decline in the efficiency in collecting accounts receivable.