a. Compute the average accounts receivable turnover ratio for The Limited Brands Inc. and H.J. Heinz Company for the years shown in Exercises 9-27 and 9-28.
b. Does The Limited Brands or H.J. Heinz Company have the higher average accounts receivable turnover ratio?
c. Explain the logic underlying your answer in (b).
Answer:
a. The average accounts receivable turnover ratios are as follows:
The Limited Brands Inc.: 34.0 [(37.3 + 30.7) ÷ 2]
H.J. Heinz Company: 9.4 [(9.3 + 9.5) ÷ 2]
Note: For computations of the individual ratios, see Ex. 9–27 and Ex. 9–28.
b. The Limited Brands has the higher average accounts receivable turnover ratio.
c. The Limited Brands operates a specialty retail chain of stores that sell directly to individual consumers. Many of these consumers (retail customers) pay with MasterCards or VISAs that are recorded as cash sales. In contrast, H.J. Heinz manufactures processed foods that are sold to food wholesalers, grocery store chains, and other food distributors that eventually sell Heinz products to individual consumers. Accordingly, because of the extended distribution chain, we would expect Heinz to have more accounts receivable than The Limited Brands. In addition, we would expect Heinz’s business customers to take a longer period to pay their receivables. Thus, we would expect Heinz’s average accounts receivable turnover ratio to be lower than The Limited Brands, as shown in (a).