Q27E - Horngren'S Financial And Managerial Accounting

Question

Unique Media Sign Incorporated sells on account. Recently, Unique reported the following figures:

	2018	2017
Net Credit Sales	\( 594,920	\)602,000
Net Receivables at end of year	38,500	47,100

 

Requirements

1. Compute Unique’s days’ sales in receivables for 2018. (Round to the nearest day.)

2. Suppose Unique’s normal credit terms for a sale on account are 2/10, net 30. How well does Unique’s collection period compare to the company’s credit terms? Is this good or bad for Unique?

Step-by-Step Solution

Answer

1. The days’ sales in receivables is 26 days.
2. The credit policy is good. 

Step 1: Definition of accounts receivable turnover ratio

The accounts receivable turnover ratio says the number of times the company collects the average accounts receivable balance in a year.

Step 2: Calculation of Day’s sales in receivables of the Unique

$\begin{array}{c}\mathrm{Accounts}\mathrm{Turnover}\mathrm{Ratio}=\frac{\mathrm{Net}\mathrm{Credit}\mathrm{Sales}}{\mathrm{Average}\mathrm{Net}\mathrm{Accounts}\mathrm{Receivables}}\\ =\frac{\mathrm{\$}594,930}{\frac{\mathrm{\$}38,500+\mathrm{\$}47,100}{2}}\\ =13.9\mathrm{times}\end{array}$

$\begin{array}{c}\mathrm{Day}\text{'}\mathrm{s}\mathrm{Sales}\mathrm{in}\mathrm{R}\mathrm{Dayseceivables}=\frac{\text{Average Recievables}}{\text{Net\hspace{0.17em}credit\hspace{0.17em}sales}}\times 365\\ =\frac{\mathrm{\$}42,800}{\mathrm{\$}594,920}\times 365\\ =26\mathrm{Days}\end{array}$

Step 3: Credit policy

As the company has a policy of 2/10 and a net of 30 days, the company is taking 26 days to collect receivables, which is within the credit policy. So the policy is considered good.