EX 17-10 Accounts receivable analysis

Xavier Stores Company and Lestrade Stores Inc. are large retail department stores. Both companies offer credit to their customers through their own credit card operations. Information from the financial statements for both companies for two recent years is as follows (all numbers are in millions):



Xavier Lestrade
Merchandise sales $8,500,000 $4,585,000
Credit card receivables—beginning 820,000 600,000
Credit card receviables—ending 880,000 710,000


a. Determine the (1) accounts receivable turnover and (2) the number of days’ sales in receivables for both companies. Round to one decimal place.

b. Compare the two companies with regard to their credit card policies.


Answer:

a. (1) Accounts Receivable Turnover = Net Sales
Average Accounts Receivable
Xavier: $8,500,000
($820,000 + $880,000) ÷ 2 = 10.0
Lestrade: $4,585,000
($600,000 + $710,000) ÷ 2 = 7.0
(2) Number of Days’ Sales in Receivables = Average Accounts Receivable
Average Daily Sales
($820,000 + $880,000) ÷ 2
Xavier: =
$23,287.7 *
36.5 days
Lestrade: ($600,000 + $710,000) ÷ 2
$12,561.6 ** = 52.1 days
* $23,287.7 = $8,500,000 ÷ 365 days
** $12,561.6 = $4,585,000 ÷ 365 days


b. Xavier’s accounts receivable turnover is much higher than Lestrade’s (10.0 for Xavier vs. 7.0 for Lestrade). The number of days’ sales in receivables is lower for Xavier than for Lestrade (36.5 days for Xavier vs. 52.1 days for Lestrade). These differences indicate that Xavier is able to turn over its receivables more quickly than Lestrade. As a result, it takes Xavier less time to collect its receivables.