EX 9-27 Accounts receivable turnover and days’ sales in receivables

H.J. Heinz Company was founded in 1869 at Sharpsburg, Pennsylvania, by Henry J. Heinz. The company manufactures and markets food products throughout the world, including ketchup, condiments and sauces, frozen food, pet food, soups, and tuna. For two recent years, H.J. Heinz reported the following (in thousands):



Year 2 Year 1
Net sales $10,706,588 $10,494,983
Accounts receivable 1,265,032 1,045,338



Assume that the accounts receivable (in thousands) were $1,171,797 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 days’ sales in receivables at the end of Year 2 and Year 1. Round to one decimal place.
c. What conclusions can be drawn from these analyses regarding Heinz’s efficiency in collecting receivables?


Answer:
 

a. and b.
Net sales……………………………
Accounts receivable………………
Average accts. receivable………
Accts. receivable turnover………
Average daily sales………………
Days’ sales in receivables………
Year 2 Year 1
$10,706,588 $10,494,983
$1,265,032 $1,045,338
$1,155,185 $1,108,567.5
[($1,265,032 + $1,045,338) ÷ 2] [($1,045,338 + $1,171,797) ÷ 2]
9.3 9.5
($10,706,588 ÷ $1,155,185) ($10,494,983 ÷ $1,108,567.5)
$29,333.1 $28,753.4
($10,706,588 ÷ 365 days) ($10,494,983 ÷ 365 days)
39.4 38.6
($1,155,185 ÷ $29,333.1) ($1,108,567.5 ÷ $28,753.4)



c. The accounts receivable turnover indicates a decrease in the efficiency of collecting accounts receivable by decreasing from 9.5 to 9.3, an unfavorable trend. The number of days’ sales in receivables increased from 38.6 to 39.4 days, also indicating an unfavorable trend in collections of receivables. These unfavorable trends are consistent with the economic downturn that occurred worldwide in Year 1 and Year 2. However, before reaching a final conclusion, both ratios should be compared with those of past years, industry averages, and similar firms.