Question

Problem 9.2 – Determine what is a real sale (LO 9.3)

Blue, Inc., sells playground equipment to schools and municipalities. It mails invoices at the end of each month for all goods shipped during that month; credit terms are net 30 days. Sales and accounts receivable data for 20X1, 20X2, and 20X3 follow:

Years Ending December 31,

20X1

20X2

20X3

Sales

$

1,785,980

$

1,839,559

$

1,986,724

Accounts receivable at year-end

220,189

227,896

267,094

Required:

1. Calculate the rates of increase in sales and in receivables during 20X2 and 20X3. (Do not round intermediate calculations. Round "Sales grew" answers to the nearest whole percent and "Receivables grew" answers to 1 decimal place.)

Transaction

1

Sales Grew

20X2

20X3

Receivables Grew

20X2

20X3

2. Do your calculations indicate any potential problems with Blue’s receivables?

Answer 1

1)

		Year Ending December 31
	2001	2002	2003
Sales	$1,785,980	$1,839,559	$1,986,724
Accounts receivable at year End	2,20,189	2,27,896	2,67,094

Requirement 1 : Sales growth

Sales grew by 3% in 2002 ([$1,839,559 - $1,785,980] ÷ $1,785,980) while receivables grew by 3.5% ([$227,896 - $220,189] ÷ $220,189). However, sales grew by 8% in 2003 ([$1,986,724 - $1,839,559] ÷ $1,839,559) while receivables grew by 17.2% ([$267,094 - $227,896] ÷ $227,896).

2)

Requirement 2   Potential problem

The data in 2002 do not suggest any potential problems because growth rates in sales and accounts receivable should be roughly equal in the absence of changes in sales terms, customer credit standing, or accounting methods. However, the growth rate disparity in 2003 suggests that one or more of these factors has come into play.

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