EX 9-28 Accounts receivable turnover and days’ sales in receivables

The Limited Brands Inc. sells women’s clothing and personal health care products through specialty retail stores including Victoria’s Secret and Bath & Body Works stores. The Limited Brands reported the following (in millions) for two recent years:


Year 2 Year 1
Net sales $9,613 $8,632
Accounts receivable 267 249




Assume that accounts receivable (in millions) were $313 at the beginning of Year 1.
a. Compute the accounts receivable turnover for Year 2 and Year 1. Round to one decimal place.
b. Compute the day’s sales in receivables for Year 2 and Year 1. Round to one decimal place.
c. What conclusions can be drawn from these analyses regarding The Limited Brands’ efficiency in collecting receivables?


Answer:


a. and b.
Net sales…………………………
Accounts receivable…………
Year 2 Year 1
$9,613 $8,632
$ 267 $ 249
Average accts. receivable…… $ 258 $ 281
[($267 + $249) ÷ 2] [($249 + $313) ÷ 2]
Accts. receivable turnover…… 37.3 30.7
($9,613 ÷ $258) ($8,632 ÷ $281)
Average daily sales……………
Days’ sales in receivables……
$26.3
($9,613 ÷ 365 days)
9.8
$23.6
($8,632 ÷ 365 days)
11.9
($258 ÷ $26.3) ($281 ÷ $23.6)




c. The accounts receivable turnover indicates an increase in the efficiency of collecting accounts receivable by increasing from 30.7 to 37.3, a favorable trend. The days’ sales in receivables indicates an increase in the efficiency of collecting accounts receivable by decreasing from 11.9 to 9.8, also indicating a favorable trend. Before reaching a conclusion, however, the ratios should be compared with industry averages and similar firms.