EX 9-28 Accounts receivable turnover and days’ sales in receivables

The Limited Brands Inc. sells women’s clothing and personal health care products through specialty retail stores including Victoria’s Secret and Bath & Body Works stores. The Limited Brands reported the following (in millions):
                                                                For the Period Ending
                                                         Jan. 31, 2010    Jan. 31, 2009
Net sales                                               $8,632                $9,043
Accounts receivable                                 249                     313

Assume that accounts receivable (in millions) were $355 at the beginning of fiscal year 2009.
a. Compute the accounts receivable turnover for 2010 and 2009. Round to one decimal place.
b. Compute the day’s sales in receivables for 2010 and 2009. Round to one decimal place.
c. What conclusions can be drawn from these analyses regarding The Limited Brands’ efficiency in collecting receivables?

Answer:
a. and b.
For the Period Ending    Jan. 31, Jan. 31,    2010   2009   Net sales................................. $8,632  $9,043  Accounts receivable.............. $249  $313  Average accts. receivable..... $281 [($249 + $313)/2] $334 [($313 + $355)/2]  Accts. receivable turnover.... 30.7 ($8,632/$281) 27.1 ($9,043/$334)  Average daily sales............... $23.6 ($8,632/365) $24.8 ($9,043/365)  Days’ sales in receivables .... 11.9 ($281/$23.6) 13.5 ($334/$24.8)  

c. The accounts receivable turnover indicates an increase in the efficiency of collecting accounts receivable by increasing from 27.1 to 30.7, a favorable trend. The days’ sales in receivables indicates an increase in the efficiency of collecting accounts receivable by decreasing from 13.5 to 11.9, also indicating a favorable trend. Before reaching a conclusion, however, the ratios should be compared with industry averages and similar firms.  

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