Question

At the end of 2019, Geisel, Inc has a $1,000 debit balance in the Allowance for Doubtful Accounts, before adjusting entries were prepared. Credit sales for 2019 totaled $510,000. Sales returns for 2019 were $10,000. Credit Sales for 2018 were $610,000. Sales returns for 2018 were $10,000. The following aging analysis of Accounts Receivable was prepared at December 31, 2019:

Age Classification	12/31/19         $ Amount	Estimated % Uncollectible
Current/not yet due	110,000	1%
1-30 days past due	15,000	2%
31-60 days past due	10,000	6%
61-90 days past due	5,000	12%
over 90 days past due	8,000	30%
Total	$148,000

1. Calculate the accounts receivable turnover ratio and the days to collect for 2018 and 2019 (round each calculation to one decimal place). The net receivables balance reported on the company’s 12/31/17 financial statements was $120,000. The net receivables balance reported on the 12/31/18 financial statements was $130,000. [4 marks]

2019

2018

2. Discuss the implications of the receivables turnover ratio and days to collect as calculated in part b. Discuss possible reasons for any changes in the calculations.

Answer 1

1. Calculation of Accounts Receivable Turnover Ratio & Days to Collect is as below:

Particulars	2019	2018
Credit Sales (a)	5,10,000.00	6,10,000.00
Sales Return (b)	10,000.00	10,000.00
Net Cedit Sales = c = (a-b)	5,00,000.00	6,00,000.00
Opening Accounts Receivable (d)	1,30,000.00	1,20,000.00
Closing Accounts Receivale (e)	1,48,000.00	1,30,000.00
Average Accounts Receivable = f = (d+e)/2	1,39,000.00	1,25,000.00
Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable = c / f	3.6	4.8
No. of days in year	365	365
Days to Collect = 365 / Accounts Receivable Turnover Ratio	101.5	76.0

2. Implications of the Accounts receivables turnover ratio and days to collect as calculated above:

Accounts receivables turnover ratio: This ratio measures how efficient is the company in collecting its debts. This ratio measures how many times does a company collects its accounts receivable during a given period of time.

Days to collect: This ratio measures the time taken by the company to convert its credit sales into cash. This ratio tells the number of days in which the company's accounts receivable gets converted into cash.

Reasons for changes in the calculation: The Accounts receivable turnover ratio of the company in 2018 was higher than the Accounts receivable turnover ratio in 2019, hence, the company's efficieny in debt collection has gone down in 2019. The reason for lower turnover ratio is lower credit sales and higher average accounts receivable.

Further, the Days to collect for the company has gone up in 2019 against 2018. This indicates that the time taken by the company to convert its credit sales into cash has gone up, therefore indicating decline in efficiency. This is because the accounts receivable turnover ratio of the company has gone down from 2018 to 2019.