Assume that Hickory Company has the following data related to its accounts receivable:

2005
Net Sales $ 1,425,000
Net receivables
Beginning of year 375,000
End of year 420,000

2006
Net Sales $ 1,650,000
Net receivables
Beginning of year 333,500
End of year 375,000

Use the data to compute accounts receivable turnover ratios and average collection periods for 2005 and 2006.

Based on your analysis, is Hickory Company managing its receivables better or worse in 2006 than it did in 2005?

Please help with the above question.

To answer this question, we need to calculate the accounts receivable turnover ratio and the average collection period for both 2005 and 2006.

The accounts receivable turnover ratio measures how many times, on average, the company collects its accounts receivable during a period. Here is how you can calculate it:

1. For 2005, divide the net sales by the average accounts receivable for the year.
Accounts Receivable Turnover Ratio = Net Sales / Average Accounts Receivable

Average Accounts Receivable = (Beginning of Year Receivables + End of Year Receivables) / 2

Plug in the values for 2005:
Average Accounts Receivable = (375,000 + 420,000) / 2 = 397,500
Accounts Receivable Turnover Ratio = 1,425,000 / 397,500 = 3.58

2. Follow the same steps to calculate the accounts receivable turnover ratio for 2006:
Average Accounts Receivable = (333,500 + 375,000) / 2 = 354,250
Accounts Receivable Turnover Ratio = 1,650,000 / 354,250 = 4.65

Now, let's calculate the average collection period, which measures the number of days it takes, on average, for the company to collect its accounts receivable:

Average Collection Period = 365 days / Accounts Receivable Turnover Ratio

For 2005:
Average Collection Period = 365 / 3.58 = 101.95 days

For 2006:
Average Collection Period = 365 / 4.65 = 78.49 days

Based on the analysis, we can conclude that Hickory Company is managing its receivables better in 2006 than it did in 2005. This is because the accounts receivable turnover ratio increased from 3.58 in 2005 to 4.65 in 2006. Additionally, the average collection period decreased from 101.95 days in 2005 to 78.49 days in 2006. A higher turnover ratio and a shorter average collection period indicate that the company is collecting its receivables more quickly in 2006, which is a positive sign of improved receivables management.