Company Baker has total sales of $367,450, of which, $63,475 represent cash sales. Its annual...

Question:

Company Baker has total sales of $367,450, of which, $63,475 represent cash sales. Its annual average accounts receivable balance is $54,500. What is its accounts receivable turnover in terms of days?

a. 5 days

b. 65 days

c. 89 days

d. 96 days

Receivables Management:

Receivables management is a strategy employed by the firm in managing accounts receivable and credit policy for efficient and effective collection of receivables.

Answer and Explanation:

The correct answer option is b. 65 days.

In computing accounts receivables turnover, only credit sales will be considered. Below is the step-by-step process in computing receivable turnover in days:

First, compute for the accounts receivable turnover.

{eq}Accounts~Receivable~Turnover~=~\displaystyle \frac{Credit~Sales}{Average~Accounts~Receivable} {/eq}

{eq}Accounts~Receivable~Turnover~=~\displaystyle\frac{367,450~-~63,475}{54,500} {/eq}

Accounts Receivable Turnover = 5.58x

Second, compute for the receivable turnover in days

{eq}Receivable~Turnover~in~Days~=~\displaystyle \frac{365~days}{Accounts~Receivable~Turnover} {/eq}

{eq}Receivable~Turnover~in~Days~=~\displaystyle \frac{365~days}{5.58x} {/eq}

Company Baker's receivables turnover in days is 65.41 or 65 days

Depending on the company's credit policy on accounts receivable collection, the receivables turnover in days will be used to compare the collection period imposed by the firm on its customers.


Learn more about this topic:

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Receivables Management: Definition & Purpose

from Accounting 101: Financial Accounting

Chapter 7 / Lesson 4
20K

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