The Limited Brands Inc. sells women’s clothing and personal health care products through specialty retail

The Limited Brands Inc. sells women’s clothing and personal health care products through specialty retail stores including Victoria’s Secret and Bath & Body Works stores. The Limited Brands reported the following (in millions) for two recent years:


Year 2 Year 1
Net sales $9,613 $8,632
Accounts receivable 267 249




Assume that accounts receivable (in millions) were $313 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 day’s sales in receivables for Year 2 and Year 1. Round to one decimal place.
c. What conclusions can be drawn from these analyses regarding The Limited Brands’ efficiency in collecting receivables?


Answer:














a. and b.
Net sales…………………………
Accounts receivable…………
Year 2 Year 1
$9,613 $8,632
$ 267 $ 249
Average accts. receivable…… $ 258 $ 281
[($267 + $249) ÷ 2] [($249 + $313) ÷ 2]
Accts. receivable turnover…… 37.3 30.7
($9,613 ÷ $258) ($8,632 ÷ $281)
Average daily sales……………
Days’ sales in receivables……
$26.3
($9,613 ÷ 365 days)
9.8
$23.6
($8,632 ÷ 365 days)
11.9
($258 ÷ $26.3) ($281 ÷ $23.6)




c. The accounts receivable turnover indicates an increase in the efficiency of collecting accounts receivable by increasing from 30.7 to 37.3, a favorable trend. The days’ sales in receivables indicates an increase in the efficiency of collecting accounts receivable by decreasing from 11.9 to 9.8, also indicating a favorable trend. Before reaching a conclusion, however, the ratios should be compared with industry averages and similar firms.