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Growth Rate

Blue, inc. sells playground equipment to schools and municipalities. Invoices are mailed at the end of each month for all goods shipped during that month; credit terms are net 30 days. Sales and account receivable data for 2005, 2006, and 2007 were as follows.

Year ending December 31 2005 2006 2007
sales $1,785,980 $1,839,559 $1,986,724
Accounts receivable at year-end 220,189 227,896 267,094

Required:

1. Calculate the growth rates in sales and receivables during 2006 and 2007.

2. Do your calculations indicate any potential problems with interworld's receivables?

3. If so, suggest a possible explanations for your findings and indicate what action, if any, would then be needed to bring interworld's financial statements into conformity with GAAP.

Solution Preview

1. Calculate the growth rates in sales and receivables during 2006 and 2007.

The growth rate is given as (year 2 - year 1)/Year 1
Growth Rate in Sales
2006 - (1,839,559-1,785,980)/1,785,980 = 3%
2007 - (1,986,724-1,839,559)/1,839,559=8%

Growth Rate in receivables
2006 - (227,896-220,189)/220,189 = 3.5%
2007 - (267,094-227,896)/227,896=17.2%

2. Do your calculations indicate any potential problems with interworld's ...

Solution Summary

The solution explains how to calculate the growth rate in sales and receivables and the indication of any potential problem

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