Question

Below are amounts (in millions) from three companies' annual reports.

Beginning Ending Accounts
Accounts Receivable Receivable Net Sales
WalCo $1,735 $2,682 $314,427
TarMart 5,766 6,294 59,878
CostGet 549 585 60,963
1. Calculate the receivables turnover ratio and the average collection period for WalCo, TarMart and CostGet.
2. Which company appears most efficient in collecting cash from sales?

Answer 1

1. Average Accounts Receivables = (Opening AR+Closing AR)/2

WalCo = 1,735 + 2,682 / 2 = 2208.5 = 2209

TarMart= 5,766 + 6,294 / 2 = 6030

CostGet= 549 + 585 / 2 = 567

Receivable Turnover Ratio = Net Sales / Average Accounts Receivables

WalCo= 314,427 / 2209 = 142.339 = 142.34

TarMart= 59,878 / 6030 = 9.903 = 9.90

CostGet= 60,963 / 567= 107.518 = 107.52

Average Collection Period = 365 / Receivable Turnover Ratio

WalCo= 365 / 142.34 = 2.56

CostGet= 365 / 9.90= 36.87

TarMart= 365 / 107.52= 3.39

2. Walco Company is the best Since it collects its AR in 2.56 days