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Problem Solving Survival Guide to accompany Financial Accounting, 8th Edition by Donald E. Kieso, Paul D. Kimmel, Jerry J. Weygandt

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EXERCISE 8-6

Purpose: (L.O. 9) This exercise will review the measures used to evaluate the liquidity of accounts receivable.

The management of M. F. Specie Company is analyzing the entity's recent financial statements to determine the efficiency of the company's credit policies for customers. The following information is extracted from the statements:

Sales $930,000
Sales returns 30,000
Accounts receivable, 12/31/14 85,000
Accounts receivable, 12/31/13 60,000

Instructions

  1. Assuming all sales are credit sales (on account), compute the receivables turnover for 2014.
  2. Assuming the company's policy is to require payment within 30 days of invoicing a customer and invoices are sent within two days of a sale, explain whether the company's average collection period suggests that the company has weak or strong controls surrounding its credit-granting activity.

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