Ending balances of net accounts receivable for

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Chapter 3 / Exercise E3-10
Survey of Accounting
Warren
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ending balances of net accounts receivable. For example, in 2008 Cisco Systems had net sales of $33,099 million for the year. It had a beginning accounts receivable (net) balance of $3,989 million and an ending accounts receivable (net) balance of $3,821 million. Assuming that Cisco’s sales were all on credit, its accounts receivable turnover ratio is computed as follows. Explain the statement presentation and analysis of receivables. S T U D Y O B J E C T I V E 9 Illustration 8-15 Accounts receivable turnover ratio and computation Net Credit Sales Average Net Accounts Receivable Accounts Receivable Turnover $33,099 $3,989 2 $3,821 8.5 times The entry recorded by Gambit Stores at the maturity date is: Cash 3,502 Notes Receivable 3,400 Interest Revenue 102 (To record collection of Leonard note) Related exercise material: BE8-9, BE8-10, BE8-11, E8-10, E8-11, E8-12, E8-13, and 8-3. Do it! The Navigator JWCL165_c08_356-395.qxd 7/31/09 3:20 PM Page 374
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Chapter 3 / Exercise E3-10
Survey of Accounting
Warren
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before you go on... Companies frequently use the average collection period to assess the effec- tiveness of a company’s credit and collection policies. The general rule is that the collection period should not greatly exceed the credit term period (that is, the time allowed for payment). Statement Presentation and Analysis 375 Do it! In 2011, Lebron James Company has net credit sales of $923,795 for the year. It had a beginning accounts receivable (net) balance of $38,275 and an ending accounts receiv- able (net) balance of $35,988. Compute Lebron James Company’s (a) accounts receivable turnover and (b) average collection period in days. Solution Analysis of Receivables (a) Net credit sales Average net Accounts receivable accounts receivable turnover $923,795 38,275 35,988 24.9 times 2 (b) Days in year Accounts receivable Average collection turnover period in days 365 24.9 times 14.7 days Related exercise material: BE8-12, E8-14, and 8-4. Do it! Action Plan Review the formula to compute the accounts receivable turnover. Make sure that both the beginning and ending accounts receivable balances are considered in the computation. Review the formula to compute the average collection period in days. The Navigator Days in Year Accounts Receivable Average Collection Turnover Period in Days 365 days 8.5 times 42.9 days A variant of the accounts receivable turnover ratio that makes the liquidity even more evident is its conversion into an average collection period in terms of days.This is done by dividing the turnover ratio into 365 days. For example, Cisco’s turnover of 8.5 times is divided into 365 days, as shown in Illustration 8-16, to obtain approximately 42.9 days. This means that it takes Cisco about 43 days to collect its accounts receivable.

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