Calculate accounts receivable turnover ratio.
Calculate accounts receivable turnover ratio. Selected information from Mystic Corporation’s balance sheet at December 31, 2010 and income statement for the year ended December 31, 2010 is as follows:
Cash $35,000
Accounts receivable, net 73,000
Equipment, net 225,000
Interest payable 1,350
Net income 65,000
Inventory office supplies 350,000
Office supplies 5,000
Sales revenue 775,000
Interest expense 1,500
Insurance expense 5,000
Requirements
1. Calculate the corporation’s accounts receivable turnover ratio. The net accounts receivable balance at December 31, 2009, was $87,000. Round to two decimal places. Explain what the accounts receivable turnover ratio measures.
2. On average, how many days does it take Mystic to collect its receivables?
Calculate the beginning bank balance. Consider the following about computer tech’s cash account for the month of April:
• On April 30, cash per computer tech’s records was $85,834.99.
• $16,008.13 in customer payments were received April 30 but not deposited until May 1.
• Checks totaling $22,461.87 were issued in April but had not cleared the bank as of the statement date (April 30).
• According to the bank statement, service charges for April were $54.50, and the collected a $4,900 note on April 19.
Requirements
Determine the April 30 cash balance that appears on computer tech’s bank statement. (Hint: compute the true cash balance first.)
80880.49
1. To calculate the accounts receivable turnover ratio, we need to use the formula:
Accounts Receivable Turnover Ratio = Net Sales / Average Accounts Receivable
First, we need to calculate the average accounts receivable. To do this, we take the sum of the beginning and ending accounts receivable balances and divide it by 2.
Average Accounts Receivable = (Beginning Accounts Receivable + Ending Accounts Receivable) / 2
In this case, the beginning accounts receivable balance is given as $87,000, and the ending accounts receivable balance is given as $73,000.
Average Accounts Receivable = ($87,000 + $73,000) / 2 = $80,000
Next, we need to find the net sales. The net sales can be calculated by subtracting the sales returns and allowances from the total sales revenue.
Net Sales = Sales Revenue - Sales Returns and Allowances
In this case, the sales revenue is given as $775,000. The information about sales returns and allowances is not provided, so we assume it to be zero for simplicity.
Net Sales = $775,000 - $0 = $775,000
Now, we can calculate the accounts receivable turnover ratio:
Accounts Receivable Turnover Ratio = $775,000 / $80,000 = 9.69
The accounts receivable turnover ratio measures how quickly a company collects its outstanding receivables. A higher ratio indicates that the company is collecting its receivables more quickly, which is generally positive as it indicates better cash flow and liquidity.
2. To calculate the number of days it takes Mystic to collect its receivables, we need to use the formula:
Average Collection Period = 365 / Accounts Receivable Turnover Ratio
In this case, the accounts receivable turnover ratio is 9.69.
Average Collection Period = 365 / 9.69 = 37.67 days
On average, it takes Mystic Corporation approximately 37.67 days to collect its receivables.
3. To determine the April 30 cash balance that appears on computer tech’s bank statement, we need to calculate the true cash balance first. To do this, we need to consider the adjustments for the customer payments, outstanding checks, service charges, and the collected note.
True Cash Balance = Cash Per Computer Tech's Records + Customer Payments - Outstanding Checks ± Bank Adjustments
The cash per Computer Tech's records on April 30 is given as $85,834.99.
Now, let's calculate each adjustment:
Customer payments received on April 30 but not deposited until May 1: $16,008.13
Outstanding checks as of April 30: $22,461.87 (deducted as they have not cleared yet)
Service charges for April: $54.50 (deducted as an expense)
Collected note on April 19: $4,900 (added as a deposit)
Now, we can calculate the true cash balance:
True Cash Balance = $85,834.99 + $16,008.13 - $22,461.87 - $54.50 + $4,900 = $84,226.75
Therefore, the April 30 cash balance that appears on Computer Tech's bank statement is $84,226.75.