Question

The following information is from the annual financial statements of Raheem Company. Compute its accounts receivable turnover for 2016 and 2017. Compare the two years’ results and give a possible explanation for any change (competitors average a turnover of 11).

2017 2016 2015

Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . \(405,140 \)335,280 $388,000

Accounts receivable, net (year-end) . . . . . . . . . . . . 44,800 41,400 34,800

Short answer

Financial ratios are the type of analysis done by finance professionals to estimate the change in an organization’s financial statements in different years.

Step-by-step solution

Computation of accounts receivable turnover ratio for the year 2016 and 2017

$\begin{array}{rcl}\mathrm{Accounts}\mathrm{receivable}\mathrm{turnover}\mathrm{ratio}\left(2016\right)& =& \frac{\mathrm{Net}\mathrm{sales}}{\left({\displaystyle \frac{\mathrm{Accounts}\mathrm{receivable}2017+\mathrm{Accounts}\mathrm{receivables}2016}{2}}\right)}\\ & =& \frac{\$335,280}{\left({\displaystyle \frac{\$44,800+\$41,400}{2}}\right)}\\ & =& \frac{\$335,280}{\$43,150}\\ & =& 7.77\mathrm{times}\\ \mathrm{Accounts}\mathrm{receivable}\mathrm{turnover}\mathrm{ratio}\left(2017\right)& =& \frac{\mathrm{Net}\mathrm{sales}}{\left({\displaystyle \frac{\mathrm{Accounts}\mathrm{receivable}2017+\mathrm{Accounts}\mathrm{receivables}2016}{2}}\right)}\\ & =& \frac{\$405,140}{\left({\displaystyle \frac{\$44,800+\$41,400}{2}}\right)}\\ & =& \frac{\$405,140}{\$43,150}\\ & =& 9.39\mathrm{times}\end{array}$

Comparison between the ratios

As per the above calculations, the accounts receivables turnover ratio for 2016 is 7.77 times and for 2017 is 9.39 times. It implies that in the year 2016, Raheem Company was more efficient in collecting the due amount from its debtors as a result of credit sales in comparison to the year 2017.