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?

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?(Use 365 days a year. Do not round intermediate calculations and round your final answer to 2 decimal places, e.g., 32.16.)

   

Days' sales in receivables

days

 

Explanation:

This is a multistep problem involving several ratios. It is often easier to look backward to determine where to start. We need receivables turnover to find days’ sales in receivables. To calculate receivables turnover, we need credit sales, and to find credit sales, we need total sales. Since we are given the profit margin and net income, we can use these to calculate total sales as:

  

PM = NI / Sales

.071 = $188,000 / Sales

Sales = $2,647,887

  

Credit sales are 70 percent of total sales, so:

  

Credit sales = .70($2,647,887)

Credit sales = $1,853,521

  

Now we can find receivables turnover by:

  

Receivables turnover = Credit sales / Accounts receivable

Receivables turnover = $1,853,521 / $127,370

Receivables turnover = 14.55 times

  

Days’ sales in receivables = 365 days / Receivables turnover

Days’ sales in receivables = 365 / 14.55

Days’ sales in receivables = 25.08 days