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

Question

2005 / 2006

Net sales $1,425,000 / $1,650,000

Net receivables:
Beginning of year 375,000 / 333,500
End of year 420,000 / 375,000

Use these 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?

Answer 1

AR t/o = Annual Credit sales/Ave AR

2005:
AR t/o = 1,425,000/354,250 = 4.02

2006:
AR t/o = 1,650,000/397,500 = 4.15

Ave collection period = 365/AR t/o

2005:
Ave collection period = 365/4.02 = 90.8 days

2006:
Ave collection period = 365/4.15 = 87.95 days

Based on the above (and assuming there's no typo in the question) Hickory is managing its receivables better in 2006 than it did in 2005.