The controller of Peabody, Inc. has been asked to present an analysis of accounts receivable collections at the upcoming staff meeting. The following information is used:

. . . . . . .12/31, year 2 . . . . 12/31, year 1

Accounts receivable . . $100,000 . .$130,000

Allowance, doubtful accounts . .(20,000) . . (40,000)

Sales . . . . . 400,000 . . 200,000

Cost of goods sold . . 350,000. . . 70,000


What is the receivables turnover ratio as of December 31, year 2?

Correct answer: (B)

Accounts receivable turnover is calculated as: (Net Credit) Sales/Average Net Accounts Receivable.


In this question, it is first necessary to compute average net accounts receivable.


Average Net Accounts Receivable = [Beginning Net Accounts Receivable ($130,000 - $40,000 = $90,000) + Ending Net Accounts Receivable ($100,000 - $20,000 = $80,000)]/2 = ($90,000 + $80,000 = $170,000)/2 = $85,000


Accounts Receivable Turnover = $400,000/$85,000 = 4.705