The 2011 income statements of Leggett & Platt, Inc., reports net sales of $3,636.0 million in 2011 and $3,359.1 million in 2010. The balance sheet reports accounts and other receivables, gross of $527.9 million at December 31, 2011, and $501.0 million at December 31, 2010. Calculate the average number of days that receivables were outstanding in 2011. Explain in plain English, what this ratio means. Did it improve from 2010?

a) Average number of days in 2011 = 53 days

b) The days are lower than 2010, so it is better than 2010.

Explanation:

the question is to calculate the average number of days that receivables were outstanding in 2011

First, the formula

= (Accounts Receivable/The Net Credit Sales for the Period) x 365 days (days in a year)

Therefore:

1) The Net Sales for 2011 = $3,636 million

Accounts receivable for 2011 = $527.9 million

We then calculate the Receivable days outstanding for 2011 as follows

= 527.9 million / 3,636 million x 365 = 53 days

2) The Net Sales for 2010 = $3,359.1 million

Accounts receivable for 2010 = $501 million

We then calculate the Receivable days outstanding for 2010 as follows

= 501 million / 3359.1 million x 365 = 54. 4 day

It should be noted that the higher the days of receivable were outstanding then the slower the revenue collection rate after sales. Therefore, a lower number of days is better.

Based on this, 2011 is better than 2010 because the number of days have reduced from 54.4 to 53 days.