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The following information is from the annual financial statements of Raheem Company. Year 3 Year 2 Year 1 Net sales $ 308,000 $ 239,000 $ 289,000 Accounts receivable, net (year-end) 37,700 35,500 32,200 (1) Compute its accounts receivable turnover for Year 2 and Year 3. (2) Assuming its competitor has a turnover of 12.6, is Raheem performing better or worse at collecting receivables than its competitor? Better Worse

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Answer:

(1) Compute its accounts receivable turnover for Year 2 and Year 3.

  • year 2 = 7.06
  • year 3 = 8.42

(2) Assuming its competitor has a turnover of 12.6, is Raheem performing better or worse at collecting receivables than its competitor?

  • the higher the accounts receivable turnover ratio, the better. In this case, their competitor is much better at collecting their accounts receivables than Raheem.

Explanation:

                                                           Year 3          Year 2         Year 1

Net sales                                          $308,000    $239,000   $289,000

Accounts receivable, net (year-end) $37,700      $35,500      $32,200

accounts receivable turnover = net sales / average accounts receivable

accounts receivable turnover year 2 = 239,000 / [(35,500 + 32,200)/2] = 7.06

accounts receivable turnover year 3 = 308,000 / [(35,500 + 37,700)/2] = 8.42

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