May Gonzales is evaluating companies in the office supply industry and has compl
ID: 2627811 • Letter: M
Question
May Gonzales is evaluating companies in the office supply industry and has completed the following information:
14.42 Which of the companies has the lowest accounts receivable turnover in the year 20X2?
a. Company A
b. Company B
c. Company C
d. Company D
20X1
20X2
Company
Credit Sales
Average Receivables Balance
Credit Sales
Average Receivables Balance
A
$5.0 million
$1.0 million
$6.0 million
$1.2 million
B
$3.0 million
$1.2 million
$4.0 million
$1.5 million
C
$2.5 million
$0.8 million
$3.0 million
$1.0 million
D
$0.5 million
$0.1 million
$0.6 million
$1.2 million
Industry
$25.0 million
$5.0 million
$28.0 million $5.4 million
20X1
20X2
Company
Credit Sales
Average Receivables Balance
Credit Sales
Average Receivables Balance
A
$5.0 million
$1.0 million
$6.0 million
$1.2 million
B
$3.0 million
$1.2 million
$4.0 million
$1.5 million
C
$2.5 million
$0.8 million
$3.0 million
$1.0 million
D
$0.5 million
$0.1 million
$0.6 million
$1.2 million
Industry
$25.0 million
$5.0 million
$28.0 million $5.4 million
Explanation / Answer
Hi,
Please find the detailed answer as follows:
Accounts Receivables Turnover Ratio = Credit Sales/Average Accounts Receivables
Average Accounts Receivables = (Opening Accounts Receivables + Closing Accounts Receivables)/2
----------------
Company A = 6/(1+1.2)/2 = 5.45 times
Company B = 4/(1.5+1.2)/2 = 2.96 times
Company C = 3/(1+.8)/2 = 3.33 times
Company D = .6/(1.2+.1)/2 = .92 times
Option D (Company D) has the lowest accounts receivables turnover ratio.
Thanks.