Use this information to answer the following questions:
The financial records of Del Ltd reveal the following at 30 June 2012 :
$ \begin{array}{lr} & \$ \ \text { Net sales for year } & 120,000 \ \text { Cost of goods sold for year } & 90,000 \ \text { Inventory, 1 July 2011 } & 27,000 \ \text { Accounts receivable, 1 July } 2011 & 18,300 \ \text { Inventory 30 June } 2012 & 33,000 \ \text { Accounts receivable, 30 June 2012 } & 21,700\end{array} $
-If Del Ltd reduces the number of days' sales in receivables to 37.5,what will be the new accounts receivable turnover?
A) 6 times p.a.
B) 9.7 times p.a.
C) 12 times p.a.
D) 8 times.

Question

Quizplus · Accepted Answer

First, we need to calculate the current accounts receivable turnover:

Accounts receivable turnover = Net sales / Average accounts receivable
Average accounts receivable = (Accounts receivable, 1 July 2011 + Accounts receivable, 30 June 2012) / 2
Average accounts receivable = (18,300 + 21,700) / 2 = 20,000

Accounts receivable turnover = 120,000 / 20,000 = 6 times

Next, we need to calculate the number of days' sales in receivables:

Number of days' sales in receivables = 365 / Accounts receivable turnover
Number of days' sales in receivables = 365 / 6 = 60.83 days

To reduce the number of days' sales in receivables to 37.5, we need to speed up the collection of accounts receivable. This means that the average accounts receivable will decrease, while net sales will remain the same. We can calculate the new accounts receivable turnover using the formula:

New accounts receivable turnover = Net sales / New average accounts receivable

To find the new average accounts receivable, we need to assume that the reduction in the number of days' sales in receivables is proportional over the entire year. This means that the new average accounts receivable will be 37.5/60.83 = 0.6156 times the current average accounts receivable.

New average accounts receivable = 0.6156 x 20,000 = 12,312

New accounts receivable turnover = 120,000 / 12,312 = 9.74 times

Therefore, the new accounts receivable turnover will be approximately 9.7 times per year, which corresponds to choice B.

Use This Information to Answer the Following Questions: the Financial

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