
Concept explainers
1.
Calculate the
1.

Explanation of Solution
Profitability Ratio:
These ratios evaluate a firm’s ability to earn profits. They help the stakeholders of the company to measure the degree to which funds invested by them are efficiently used. Some of the ratios calculated return on sales, total assets and
Use the following formula to calculate the value of accounts receivable turnover in times for year 20X2:
Substitute $500,000 for net sales and $100,000 for average receivable in the above formula.
Therefore, the value of accounts receivable turnover in times is 5 times.
Use the following formula to calculate the value of accounts receivable turnover in days for year 20X2:
Substitute 365 days for days in a year and 5.00 times for average accounts receivable turnover in days in the above formula.
Therefore, the value of accounts receivable turnover in days is 73.00 days.
Use the following formula to calculate the value of accounts receivable turnover in times for year 20X3:
Substitute $600,000 for net sales and $110,000 for average receivable in the above formula.
Therefore, the value of accounts receivable turnover in times is 5.45 times.
Use the following formula to calculate the value of accounts receivable turnover in days for year 20X3:
Substitute 365 days for days in a year and 5.45 times for average accounts receivable turnover in days in the above formula.
Therefore, the value of accounts receivable turnover in days is 66.97 days.
Use the following formula to calculate the value of accounts receivable turnover in times for year 20X4:
Substitute $510,000 for net sales and $110,000 for average receivable in the above formula.
Therefore, the value of accounts receivable turnover in times is 4.64 times.
Use the following formula to calculate the value of accounts receivable turnover in days for year 20X4:
Substitute 365 days for days in a year and 4.64 times for average accounts receivable turnover in days in the above formula.
Therefore, the value of accounts receivable turnover in days is 78.66 days.
Use the following formula to calculate the value of accounts receivable turnover in times for year 20X5:
Substitute $510,000 for net sales and $125,000 for average receivable in the above formula.
Therefore, the value of accounts receivable turnover in times is 4.08 times.
Use the following formula to calculate the value of accounts receivable turnover in days for year 20X5:
Substitute 365 days for days in a year and 4.08 times for average accounts receivable turnover in days in the above formula.
Therefore, the value of accounts receivable turnover in days is 89.46 days.
Use the following formula to calculate the value of accounts receivable turnover in times for year 20X6:
Substitute $520,000 for net sales and $170,000 for average receivable in the above formula.
Therefore, the value of accounts receivable turnover in times is 3.06 times.
Use the following formula to calculate the value of accounts receivable turnover in days for year 20X6:
Substitute 365 days for days in a year and 3.06 times for average accounts receivable turnover in days in the above formula.
Therefore, the value of accounts receivable turnover in days is 119.28 days.
Working Note:
1. Calculation of average receivable:
2. Calculation of average receivable:
3. Calculation of average receivable:
4. Calculation of average receivable:
5. Calculation of average receivable:
2.
Explain the effect of the new credit policy with the help of above calculations.
2.

Explanation of Solution
Accounts receivable turnover decreased due to new credit policy because customers have 60 days to make full payment. As a result, it reduced the inflow of cash in the company. It also led to a shortage of cash due to which the company is unable to meet its short term requirements.
3.
Identify whether TP would have liberalized his company’s credit policy if it was known that industrial average was 6 times.
3.

Explanation of Solution
TP would not have liberalized the company’s credit policy if industrial average was known as accounts receivable turnover was already low as compared to the industry average.
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Chapter 15 Solutions
Managerial Accounting: The Cornerstone of Business Decision-Making
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