Question

10. Bill's Produce does 60 percent of its business during June, July, and August.

	For Year Ended	For Year Ended
	December 31, 2006	July 31, 2006
Net Sales	$700,000	$690,000
Receivables, less allowance for doubtful accounts:
Beginning of period	$ 45,000	$ 80,000
(allowance, January 1, $2,000; August 1, $3,000)
End of period
(allowance, December 31,	$ 50,000	$ 85,000
$3,000; July 31,
$3,500)

Required:

a.	Compute the days' sales in receivables for July 31, 2006, and December 31, 2006, based on the data above.
b.	Compute the accounts receivable turnover for the period ended July 31, 2006, and December 31, 2006.
c.	Comment on the results from (a) and (b).

Answer 1

a.

Day's Sales Receivables in July31, 2006	= 41.9 Days
Day's Sales Receivables in December31, 2006	= 23.46 Days

Working:

For July 31, 2006:
Day's sales In Receivables	= 365 / Accounts Receivable Turnover
Accounts Receivables Turnover	= Sales / Average Accounts Receivables
Average Accounts Receivables	=[( 80000 - 3000) + (85000 - 3500)]/2
	= [77000 + 81500]/2
	= 158500 / 2
	= $79,250
Accounts Receivables Turnover	= 690000 / 79250
	= 8.71
Day's sales In Receivables	= 365/8.71
	= 41.9
	= 41.9 Days

b.

Accounts Receivables Turnover Ratio for July 31,2006	= 8.71
Accounts Receivables Turnover Ratio for December 31,2006	= 15.56

Working:

For December 31, 2006:
Average Accounts Receivables	= [(45000 - 2000) + (50000 - 3000)]/2
	= [43000 + 47000] / 2
	= 90000 / 2
	= $45,000
Accounts Receivables Turnover	= 700000 / 45000
	= 15.56
Day's sales In Receivables	= 365 / 15.56
	= 23.46 Days

c.

Day's sales receivables up to july 31 are 42 days, but it is decreased to 23.46 days at the time of year end. It is good sign to company, because it will reduce working capital requirement.

Accounts Receivables Turnover Ration on July 31 is 8.71% but it is increased to 15.56% at the time of December 31. It is not good sign to company, because credit sales are increasing gradually.