Question

(Analysis of Receivables) Presented below is information for Jones Company.

1. Beginning-of-the-year Accounts Receivable balance was \(15,000.

2. Net sales (all on account) for the year were \)100,000. Jones does not offer cash discounts.

3. Collections on accounts receivable during the year were $70,000.

Instructions

(a) Prepare (summary) journal entries to record the items noted above.

(b) Compute Jones’s accounts receivable turnover and days to collect receivables for the year. The company does not believe it will have any bad debts.

(c) Use the turnover ratio computed in (b) to analyze Jones’s liquidity. The turnover ratio last year was 6.0

Short answer

The liquidity of the business entity is declining because of a decrease in the receivable turnover ratio.

Step-by-step solution

Definition of Liquidity Analysis

The analysis concerned with the determination of the ability of the business to repay the short-term borrowing using its current assets is known as liquidity analysis.

Summary Journal Entries

Date	Accounts and Explanation	Debit $	Credit $
1	Accounts receivables	$100,000
	Sales revenue		$100,000
2	Cash	$70,000
	Accounts receivables		$70,000

Financial Ratios

Receivables turnover ratio:

$$\begin{gathered} \mathrm{Receivables}\mathrm{Turnover}\mathrm{Ratio}=\frac{\mathrm{Net}\mathrm{Sales}}{\mathrm{Average}\mathrm{Accounts}\mathrm{Receivables}} \\ =\frac{\$100,000}{{\displaystyle \frac{15,000+\$45,000}{2}}} \\ =\frac{\$100,000}{\$30,000} \\ =3·33\mathrm{times} \end{gathered}$$