Question

During 2012, Charles Inc. recorded credit sales of $2,000,000. Based on prior experience, it estimates a 1 percent bad debt rate on credit sales. At the beginning of the year, the balance in net accounts receivable was $150,000. At the end of the year, but before the bad debt expense adjustment was recorded and before any bad debts had been written off, the balance in net accounts receivable was $125,000. Assume that on December 31, 2012, the appropriate bad debt expense adjustment was recorded for the year 2012 and accounts receivable totaling $10,000 were written off for the year, what was the receivables turnover ratio for the year? Please round to one decimal place

Answer 1

Charles Inc.

The receivables turnover ratio for the year is:

= 14.5

Step-by-step explanation:

a) Data and Calculations:

Credit Sales for 2012 = $2,000,000

Allowance for bad debt = 1% on credit sales ($20,000)

Beginning net accounts receivable = $150,000

Ending net accounts receivable = $125,000

Average receivable = ($150,000 + $125,000)/2 = $275,000/2 = $137,500

Receivables turnover ratio = Sales/Average receivable

= $2,000,000/$137,500

= 14.5

b) Charles Inc.'s Receivables Turnover Ratio shows how efficiently the company is able to manage its credit sales through effective and efficient collection of trade debts from customers. It is computed by dividing the credit sales by the average receivable.