CP 9-6

CP 9-6. Accounts receivable turnover and days' sales in receivables

Best Buy is a specialty retailer of consumer electronics, including personal computers, entertainment software, and appliances. Best Buy operates retail stores in addition to the Best Buy, Media Play, On Cue, and Magnolia Hi-Fi websites. For two recent years, Best Buy reported the following (in millions):

                                                                                                                                                                   Year2                       Year1

                                                                          Sales                                                                                39, 528                   40,339

                                                                         Accounts Receivable at the end of the year                1,162                     1,280

Assume that the accounts receivable (in millions) were $1,308 at the beginning of fiscal Year 1.

Compute the accounts receivable turnover for Year 2 and Year 

1. Round to two decimal places.

2. Compute the days' sales in receivables at the end of Year 2 and Year 1. Use 365 days and round to one decimal place.

 3. What conclusions can be drawn from (1) and (2) regarding Best Buy's efficiency in collecting receivables?

 4. What assumption did we make about sales for the Best Buy ratio computations that might distort the ratios and therefore cause the ratios not to be comparable for Year 2 and Year 1?