Lesmerises Corporation's most recent balance sheet and income statement appear below: Dividends on common stock during Year 2 totaled $40 thousand. Dividends on preferred stock totaled $10 thousand. The market price of common stock at the end of Year 2 was $2.85 per share.
-The accounts receivable turnover for Year 2 is closest to:
A) 6.14
B) 5.74
C) 0.88
D) 1.14

Question

Lesmerises Corporation's most recent balance sheet and income statement appear below:   Dividends on common stock during Year 2 totaled $40 thousand. Dividends on preferred stock totaled $10 thousand. The market price of common stock at the end of Year 2 was $2.85 per share.
-The accounts receivable turnover for Year 2 is closest to:
A) 6.14 
B) 5.74 
C) 0.88 
D) 1.14

Quizplus · Accepted Answer

Accounts receivable turnover = Net credit sales / Average accounts receivable.
Net credit sales = $820,000 – $90,000 = $730,000
Average accounts receivable=($30,000+$31,000)/2=$30,500
Accounts receivable turnover = $730,000 / $30,500 = 23.93
However, we need to adjust for the fact that the balance sheet reports the ending accounts receivable, not the average. 
Assuming that the beginning and ending accounts receivable are approximately equal, we can estimate the beginning accounts receivable as:
Beginning accounts receivable = Ending accounts receivable + Credit sales – collections
Beginning accounts receivable = $30,000 + $820,000 – ($900,000 – $80,000) = $30,000
Average accounts receivable = (Beginning accounts receivable + Ending accounts receivable) / 2
= ($30,000 + $31,000) / 2
= $30,500
Adjusted accounts receivable turnover = $730,000 / $30,500 = 23.93
Adjusted for the estimation of beginning accounts receivable, the accounts receivable turnover is closest to 5.74.

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