Question

A company has net income of $188,000, a profit margin of 7.1 percent, and an accounts receivable balance of $127,370. Assuming 70 percent of sales are on credit, what is the company’s days’ sales in receivables?

Answer 1

Answer:

The company’s day’s sales in receivable is 25.08days

Explanation:

To determine the day’s sale’s in receivable the receivable turnover is to be determined from the credit sales which is determined by using the credit sales percentage over the total sales; and the total sales is computed from using the net income and profit margin.

Computation:

$\begin{aligned}\text{Day's sales in receivable}&=\frac{\text{365 days}}{\text{Receivable Turnover}}\\&=\frac{365}{14.55}\\&=25.08\text{days} \end{aligned}$

Working Note:

$\begin{aligned}\text{Profit Margin}&=\frac{\text{Net Income}}{\text{Total Sales}}\\7.1\%&=\frac{\ 188,000}{\text{Total Sales}}\\\text{Total Sales}&=\ 2,647,887 \end{aligned}\\\\\\\begin{aligned}\text{Credit Sales}&=70\% \text{of Total Sales}\\&=70\%*\ 2,647,887\\&=\ 1,853,521\\\end{aligned}\\\\\\\begin{aligned}\text{Receivable Turnover}&=\frac{\text{Credit Sales}}{\text{Accounts Receivable}}\\&=\frac{\ 1,853,521}{\ 127,370}\\&=14.55\text{times} \end{aligned}$