AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 1 Accounts Receivable: Module 8 Slide 1 Introduction to Accounting II Professor Marc Smith CHAPTER 1 MODULE 1 Accounts Receivable Module 8 Hi everyone welcome back.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 2 Slide 2 FinancialStatementRa osRela ngtoAccountsReceivable:1. AccountsReceivableTurnover2. AverageCollec onPeriodAccounts Receivable – Module 8 Let's wrap up our modules on accounts receivable by talking about a couple of financial statement ratios that relate to accounts receivable. And there are two of them: the accounts receivable turnover ratio and the average collection period.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 3 Slide 3 AccountsReceivableTurnoverMeasuresthenumberof mesonavera gethecompanycollects itsaccountsreceivable.NetSalesRevenueAverageAcctsReceivable=AccountsReceivableTurnoverAcctsReceivableatJan.1+AcctsReceivableatDec.312=AverageAcctsReceivableAccounts Receivable – Module 8 Let's start with the turnover ratio. The accounts receivable turnover ratio measures the number of times, on average, that the company will collect its accounts receivable. To calculate the accounts receivable turnover, take your net sales revenue and divide that by your average accounts receivable. To calculate the denominator, the average accounts receivable, take your accounts receivable at the beginning of the year, at January 1, plus the accounts receivable at the end of the year, December 31, and to get an average, simply divide that by two.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 4 Slide 4 Let's talk about this ratio for a moment. The accounts receivable turnover ratio is an indication of how many times during the year the company is actually turning over, or collecting, its accounts receivable. It's basically a measure of how many times your old receivables are collected and then replaced by new receivables. So how many times are we able to get the money from the old receivables and then make new sales and put new receivables out there? And then collect those and make new receivables and put those out there. And then collect those and so on and so forth. Now remember with any ratio we can never put a value judgment on it. We can never say if it's good or not without some point of comparison, usually some type of industry average. What we can say with our accounts receivable turnover ratio, higher is better. The higher the turnover, the faster we are collecting cash from our customers, and that's good. We want to get our money as quickly as we can. So the higher the accounts receivableAMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 5 turnover ratio the faster the company is collecting its cash from its credit customers.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 6 Slide 5 AverageCollec onPeriodMeasuresthenumberofdaysonaveragebetweenmakingasaleoncreditandcollec ngourcashfromthecustomer.365AcctsReceivableTurnover=AverageCollec onPeriodLowerisbe er.Accounts Receivable – Module 8 The other ratio I wanna talk about is the average collection period. It basically tells me the same thing as the accounts receivable turnover ratio, just in a different way. The average collection period measures the number of days, on average, between making sales to your customers, making credit sales, and collecting cash from those sales. How many days, on average, elapse once the sale is made to the customer before that customer gives us their cash? To calculate the average collection period take 365, the number of days in a year divided by the accounts receivable turnover ratio that we just saw. And note, with the average collection period, lower is better. The lower the average collection period, the fewer days between making sales and collecting cash from those sales.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 7 Slide 6 AssumethatX YZC ompanyhasbeg inninga c c ountsreceivableof$35,000;endingaccountsreceivableof$40,000;andnetsal esre venueof$150,0 0 0f or 2005.Accts Receivable Turnover = ———————————— Average Accts Receivable 4 times = $150,000 ($35,000 + $40,000) ÷ 2 Net Sales Revenue Accounts Receivable – Module 8 Let's do a basic example and I have an example right here on the slide to work through. Let's assume that XYZ Company has accounts receivable of $35,000 at the beginning of the year. They have accounts receivable of $40,000 at the end of the year, and for the year they had net sales of $150,000. We can calculate our accounts receivable turnover ratio by taking the net sales divided by our average accounts receivable. Take the $150,000 and we get the average receivables by taking the beginning receivables plus the ending receivables and dividing that by two. Accounts receivable turnover ratio of four. That means we're able to collect our receivables four times during the year. Is that good? I don't know. I don't have something to compare it to. I do know that the higher the number the better, that is the faster I'm collecting my receivables, but I can't say if four is a good ratio or not without some point of comparison.AMIS 212 – Introduction to Accounting II AMIS 212 – Marc Smith 8 Slide 7 AssumethatX YZC ompanyhasbeg inninga c c ountsreceivableof$35,000;endingaccountsreceivableof$40,000;andnetsal esre venueof$150,0 0 0f or 2005.Average Collection Period = ————————————