The following information is taken from the adjusted trial balance of the Studio Art Supply Company at the end of Year 1:Studio Art Supply offers all of its charge customers the credit terms, 2/10, n/30.Required:a) Compute the accounts receivable turnover.b) Compute the average number of days to collect accounts receivable. Round your answer to a whole number for days.c) Comment on the meaning of these ratios and specifically on how well this firm is managing its accounts receivable.

Question

What will be an ideal response?

Answer 1

a) 7.63
b) 48 days
c) Given the credit terms of 2/10, n/30, these results are cause for concern. If the company gives this credit arrangement to all customers, and if many are taking advantage of the cash discount, then the ones who do are not taking advantage of the cash discount and are taking even more time than the 30 days allowed for payment (given that the average number of days to collect is almost 48 days). This firm needs to either be more cautious as to whom it grants credit or be more aggressive in its collection procedures.

a) Accounts receivable turnover ratio = Sales of $355,000 ÷ Net accounts receivable of ($48,500 ? $2,000) = 7.63
b) Average number of days to collect accounts receivable = 365 ÷ Accounts Receivable Turnover of ÷ 7.63 = 47.8 days (rounded to 48 days)