CP 9-5 Accounts receivable turnover and days’ sales in receivables
EarthLink, Inc., is a nationwide Internet Service Provider (ISP). EarthLink provides a variety of services to its customers, including narrowband access, broadband or high-speed access, and Web hosting services. For two recent years, EarthLink reported the following (in thousands):
|
Year Ending |
||
|
Dec. 31, 2009 |
Dec. 31, 2008 |
|
|
Net sales |
$723,729 |
$955,577 |
|
Accounts receivable at end of year |
66,623 |
50,823 |
Assume that the accounts receivable (in thousands) were $41,483 at January 1, 2008.
1. Compute the accounts receivable turnover for 2009 and 2008. Round to one decimalplace.
2. Compute the days’ sales in receivables at the end of 2009 and 2008. Round to onedecimal place.
3. What conclusions can be drawn from (1) and (2) regarding EarthLink’s efficiency in collecting receivables?
4. Given the nature of EarthLink’s operations, do you believe EarthLink’s accounts receivable turnover ratio would be higher or lower than a typical manufacturing company, such as Boeing or Kellogg Company? Explain.