Question

Accounts Receivable Turnover and Days' Sales in Receivables American Eagle Outfitters, Inc. sells clothing, accessories, and personal care products for men and women through its retail stores. American Eagle reported the following data (in millions) for two recent years: Year 2 Year 1 Sales 3522 3283Accounts receivable 81 68Assume that accounts receivable (in millions) were $74 million at the beginning of Year 1 a. Compute the accounts receivable turnover for Year 2 and Year 1. Round to two decimal places. Year 2: Year 1: b. Compute the day's sales in receivables for Year 2 and Year 1. Round interim calculations and final answers to one decimal place. Use 365 days per year in your $3,283 68 calculations. Year 2: Year 1: c. The change in accounts receivable turnover from year 1 to year 2 indicates a(n) a(n) days days in the efficiency of collecting accounts receivable and is___________ change. The change in the days' sales in receivables indicates a _________ change

Answer 1

Answer and Explanation:

The computation is shown below:

a. Account receivable turnover ratio is

= Net credit sales ÷ Average accounts receivable

where,

the Average accounts receivable would be

= (Accounts receivable, beginning of year + Accounts receivable, end of year) ÷ 2

For year 2

= ($3,522) ÷ ($81 + $68) ÷ 2

= 47.3 times

For year 1

= ($3,283) ÷ ($68 + $74) ÷ 2

= 46.2 times

b. The days sales in receivables is

= 365 days ÷ account receivable turnover ratio

For year 2

= 365 days ÷ 47.3 times

= 7.7 days

For year 1

= 365 days ÷ 46.2 times

= 7.9 days

c. As we can see that the change in accounts receivable turnover from year 1 to year 2 i.e from 46.2 times to 47.3 times is favorable change and it is increasing and the change in days sales in receivables from year 1 to year 2 i.e from 7.9 days to 7.7 days indicates a favorable change