Question

At the clinic of Drs. Lewis and King, the total accounts receivable at the end of May is $100,000 and the monthly receipts total is $75,000; the total accounts receivable at the end of June is $82,000 and the monthly receipts total is $31,000; the total accounts receivable at the end of July is $86,000 and the monthly receipts total is $20,000; the total accounts receivable at the end of August is $93,000 and the monthly receipts total is $45,000. What is the accounts receivable ratio? Show your calculations. Which month has the healthiest accounts receivable ratio? Why? May: _____________________________________________________________________________________June: _____________________________________________________________________________________July: _____________________________________________________________________________________August

Answer 1

Accounts receivable ratio:

Accounts receivable ratio measures how company is effective in collection of money from customers.

Whose average receivables are less then Accounts receivable ratio will be high

Higher accounts receivable ratio considered as good.

Formula :

Accounts receivable ratio = Credit Sales / Avergae accounts receivable

Month	Credit Sales	/	Avergae accounts receivable	=	Accounts receivable ratio
May	175000	/	50000	=	3.5
June	13000	/	91000	=	0.143
July	24000	/	84000	=	0.286
August	52000	/	89500	=	0.581

As we can see, May month Accounts receivable ratio is higher as compare to other months.

May month : Accounts receivable ratio 3.5 says that, company collects receivables 3.5 times in may month.

Thus, May month has the healthiest accounts receivable ratio.

Working Note:

1. Ending accounts receivable of month becomes beginning accounts receivable balance of next month;

In this case: Ending accounts receivable of may month becomes beginning accounts receivable of June month & like Ending balance of June month is beginning balance of july month

In this case beginning accounts receivable balance not given directly or indirectly. Thus it is zero .

2. Calculation of sales revenue:

From available information of Beginning accounts receivable balance, Ending receivable balance & collection amount we can calculate sales:

Sales = Ending accounts receivable + Collection - Beginning accounts receivable

Therefore,

Month	Beginning accounts receivable	Ending accounts receivable	Collection	Sales
	(i)	(ii)	(iii)	(iv)[(iii)+(ii)-(i)]
May	$                                                        -	$                                    1,00,000	$    75,000	$            1,75,000
June	$                                           1,00,000	$                                        82,000	$    31,000	$                13,000
July	$                                               82,000	$                                        86,000	$    20,000	$                24,000
August	$                                               86,000	$                                        93,000	$    45,000	$                52,000

3. Calculation of Average accounts receivable:

Avergae accounts receivable = ( Beginning accounts receiavble + Ending accounts receivable) / 2

Month	(Beginning accounts receiavble	+	Ending accounts receivable)	/	2	=	Avergae accounts receivable
May	$                                                        -	+	$                                    1,00,000	/	2	=	$                                           50,000
June	$                                           1,00,000	+	$                                        82,000	/	2	=	$                                           91,000
July	$                                               82,000	+	$                                        86,000	/	2	=	$                                           84,000
August	$                                               86,000	+	$                                        93,000	/	2	=	$                                           89,500