What are Big Store’s and Discount Goods’ receivables turnover ratios in (a) 2012 and (b) 2021?
The correct answer and explanation is:
To calculate the receivables turnover ratio for Big Store and Discount Goods for the years 2012 and 2021, the formula is: Receivables Turnover Ratio=Net Credit SalesAverage Accounts Receivable\text{Receivables Turnover Ratio} = \frac{\text{Net Credit Sales}}{\text{Average Accounts Receivable}}
Where:
- Net Credit Sales is the total credit sales for the company during the year.
- Average Accounts Receivable is the average amount of accounts receivable during the year, calculated as:
Average Accounts Receivable=Accounts Receivable at Beginning of Year+Accounts Receivable at End of Year2\text{Average Accounts Receivable} = \frac{\text{Accounts Receivable at Beginning of Year} + \text{Accounts Receivable at End of Year}}{2}
(a) 2012 Receivables Turnover Ratio
To calculate the ratio for 2012, you need the following data for that year:
- Net Credit Sales for 2012.
- Accounts Receivable at the beginning and end of 2012.
Once you have these values, apply the formula. Higher receivables turnover ratios typically suggest that the company is efficiently collecting its credit sales, while lower ratios might indicate collection problems or slower turnover.
(b) 2021 Receivables Turnover Ratio
Similarly, for 2021, gather the necessary data:
- Net Credit Sales for 2021.
- Accounts Receivable at the beginning and end of 2021.
The resulting ratio will provide insights into how well Big Store and Discount Goods managed their receivables in 2021 compared to 2012.
Explanation
A high receivables turnover ratio means that a company is able to collect its receivables quickly, which is generally a sign of effective credit management. A low ratio, on the other hand, can indicate potential issues with the company’s collection process, higher risk of bad debts, or that the company is allowing customers to take longer to pay. A comparison between 2012 and 2021 can also highlight trends in credit policies, the company’s ability to manage receivables, or broader economic factors impacting the business.
Do you have the specific figures for Big Store and Discount Goods to perform the calculation?