Polo Ralph Lauren Corporation designs, markets, and distributes a variety of apparel, home decor, accessory, and fragrance products

Polo Ralph Lauren Corporation designs, markets, and distributes a variety of apparel, home decor, accessory, and fragrance products. The company’s products include such brands as Polo by Ralph Lauren, Ralph Lauren Purple Label, Ralph Lauren, Polo Jeans Co., and Chaps. Polo Ralph Lauren reported the following (in thousands) for two recent years:



For the Period Ending
Year 2 Year 1
Net sales $5,660,300 $4,978,900
Accounts receivable 592,700 486,200




Assume that accounts receivable (in millions) were $576,700 at the beginning of Year 1.

a. Compute the accounts receivable turnover for Year 2 and Year 1. Round to one decimal place.
b. Compute the days’ sales in receivables for Year 2 and Year 1. Round to one decimal place.
c. What conclusions can be drawn from these analyses regarding Ralph Lauren’s efficiency in collecting receivables?


Answer:

a. and b.
Net sales……………………………
Year 2 Year 1
$5,660,300 $4,978,900
Accounts receivable………………
Average accts. receivable………
Accts. receivable turnover………
$592,700
$539,450
[($592,700 + $486,200) ÷ 2]
10.5
$486,200
$531,450
[($486,200 + $576,700) ÷ 2]
9.4
($5,660,300 ÷ $539,450) ($4,978,900 ÷ $531,450)
Average daily sales………………
Days’ sales in receivables………
$15,507.7
($5,660,300 ÷ 365 days)
34.8
$13,640.8
($4,978,900 ÷ 365 days)
39.0
($539,450 ÷ $15,507.7) ($531,450 ÷ $13,640.8)




c. The accounts receivable turnover indicates an increase in the efficiency of collecting accounts receivable by increasing from 9.4 to 10.5, a favorable trend. The days’ sales in receivables also indicates an increase in the efficiency of collecting accounts receivable by decreasing from 39.0 to 34.8, which is a favorable trend. However, before reaching a final conclusion, the ratios should be compared with industry averages and similar firms.