• Compute and compare the accounts receivable turnover ratios for Coca-Cola and Wal-Mart. Indicate all numbers you used to calculate the ratio.

What constitutes a “reasonable” accounts receivable turnover ratio? What characteristic(s) of these companies would indicate that these ratios are reasonable?

Accounts Receivable Turnover = Net Credit sales

Average Accounts Receivables

Coca-Cola Company

Receivable are assets. Therefore, the average accounts receivable for the 2014 fiscal year is,

4,466 + 4873 =   9339/2 = 4669.5 (Coca-Cola Company, 2014)

2

The net credit sales is 45,998         (Coca-Cola Company, 2014)

Account receivable turnover = 45,998   = 9.85

4,669.5

Wal-Mart Company

The average account receivable for the 2014 fiscal year is,

6,677 + 6768 = 13,445/2 = 6722.5 (Wal-Mart Company, 2014)

2

The net credit sales is 473,076.

Account receivable turnover = 473,076 = 70.37 (Wal-Mart Company, 2014)

6,722.5

From the results obtained, Wal-Mart has a better turnover ratio than Coca-Cola Company. Account receivable ratio shows the efficiency and how quickly creditors pay the company (Moles, Parrino, & Kidwell, 2011). Between the two companies, Wal-Mart has a higher account receivable turnover; hence, the company will have a shorter time between the sale of a product and collection of cash. A good turnover for the company should be at least once in a month. Wal-Mart portrays a turnover that is over while Coca-Cola has a turnover that is under. Therefore, Wal-Mart’s efficiency of accounts collection is brief.

• An article recently appeared in the Wall Street Journal indicating that companies are selling their receivables at a record rate. Why might Coca-Cola and Wal-Mart sell their receivables?

Coca-Cola and Wal-Mart might sell their receivable to a factoring company because of the following reasons. First, they might sell their receivable to get an immediate influx of cash (Moles, Parrino, & Kidwell, 2011). These two companies are growing very fast, and also they face a shortage of cash. The factoring company will pay upfront for the purchased receivable but less the service fee. Second, it will help the two companies reduce the personnel. Companies consume more time when collecting receivable; however, selling them to a third party helps to eliminate the personnel that perform such function (Moles, Parrino, & Kidwell, 2011). Lastly, the two companies might sell their receivables to improve their credit rating. Selling receivable brings more cash to the company; hence, the company will benefit since there will be available funds to pay creditors and other vendors on a time basis.

References

Coca-Cola Company. (2014). 2014 annual report on form 10-K. Retrieved from http://www.cocacolacompany.com/content/dam/journey/us/en/private/fileassets/pdf/2015/02/2014-annual-report-on-form-10-k.pdf.

Moles, P., Parrino, R., & Kidwell, D. S. (2011). Fundamentals of corporate finance. Hoboken, NJ: Wiley.