Problem: The president of Castle Enterprises Ltd., Nicole Castle, is considering the impact that certain transactions have on its receivables turnover and average collection period ratios. Prior to the following transactions, Castle’s receivables turnover was 6 times, and its average collection period was 61 days.
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Transaction
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Receivables
Turnover
(6x)
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Average
Collection
Period
(61 days)
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1. Recorded sales on account $100,000.
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2. Collected $25,000 owing from customers.
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3. Recorded bad debts expense for the year $7,500, using the allowance method.
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4. Recorded sales returns of $1,500 and credited the customers' accounts.
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5. Wrote off a $2,500 account from a customer as uncollectible.
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Instructions:
1) Complete the table, indicating whether each transaction will increase (I), decrease (D), or have no effect (NE) on the ratios.
Nicole was reading through the financial statements for some publicly traded companies and noticed that they had recorded a loss on sale of receivables. She would like you to explain why companies sell their receivables.