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    Accounts Receivable, Assets, Liabilities and Earnings

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    22. The following calculations have been made for Coos Company:

    Growth Rate
    Net sales 10.5%
    Total accounts receivable 21.3%
    Allowance for doubtful accounts 2.6%

    Current Year Prior Year
    Allowance for doubtful accounts as a
    percentage of total accounts receivable 3.8% 5.4%

    Analyze the accounts receivable and allowance for doubtful accounts

    24. Use the following common size balance sheet to answer the questions below:

    a) Explain what has happened to current assets and long-term assets.

    b) Explain the changes in the liabilities section of the balance sheet.

    c) What has occurred to Retained Earnings at year-end? What is the company's financial position?
    2011 2010
    Current assets:
    Cash 3% 5%
    Accounts receivable 20 18
    Inventory 35 30
    Total current assets 58% 53%

    Property, plant and equipment 30 40
    Other assets 12 7
    Total assets 100% 100%

    Current liabilities:
    Accounts payable 25% 20%
    Short-term debt 38 33
    Total current liabilities 63% 53%

    Long-term debt 22 17
    Total liabilities 85% 70%

    Common stock and paid in capital 14 20
    Retained earnings 1 10
    Total stockholders' equity 15% 30%
    Total liabilities and stockholders' equity 100% 100%

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    Solution Preview

    22. This requires you to know that AR balances should move in similar ways as sales. If sales double, you would expect AR to double too. Here sales went up 10.5% but AR did not move in a similar way. It went up almost twice that amount....21.3% (vs. 10.5%). Why would AR grow? Because you are not collecting the sales. That is a problem. What kind of problem? Well, they do not give you much information so you can only speculate.

    Here are some potential theories:

    Theory about lower credit clients: Just added new customers at year end who have marginal credit and are not paying.

    The theory about surge at year end: You just booked a very large sale at year end and it is not yet due.

    Theory about change in sales terms: The recession just hit and you agreed to allow ...

    Solution Summary

    Your discussion is 525 words and gives three potential theories for the AR shifts and discusses what may lead to the changes in common sized percent. The financial position is unfavorable and the reasons are given.