Fundamentals Of Financial Accounting
Fundamentals Of Financial Accounting
6th Edition
ISBN: 9781259864230
Author: PHILLIPS, Fred, Libby, Robert, Patricia A.
Publisher: Mcgraw-hill Education,
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Textbook Question
Chapter 8, Problem 5PA

Analyzing Allowance for Doubtful Accounts, Receivables Turnover Ratio, and Days to Collect

Coca-Cola and PepsiCo are two of the largest and most successful beverage companies in the world in terms of the products that they sell and their receivables management practices. To evaluate their ability to collect on credit sales, consider the following rounded amounts reported in their annual reports (amounts in millions).

Chapter 8, Problem 5PA, Analyzing Allowance for Doubtful Accounts, Receivables Turnover Ratio, and Days to Collect Coca-Cola

Required:

  1. 1. Calculate the receivables turnover ratios and days to collect for Coca-Cola and PepsiCo for 2015 and 2014. (Round to one decimal place.)
  2. 2. Which of the companies is quicker to convert its receivables into cash?

1.

Expert Solution
Check Mark
To determine

Calculate the receivables turnover ratio and days to collect of Company C and Company P for 2015 and 2014.

Explanation of Solution

Accounts receivable turnover: This is the ratio which analyzes the number of times accounts receivables is collected and converted into cash during the period. This ratio gauges the efficacy of collecting receivables. The more times the ratio indicates the more efficient in collecting receivables.

Average days to collect accounts receivable (average collection period): This ratio measures the number of times receivables are collected in the period. This ratio analyzes the period receivables are outstanding. So, this ratio also gauges the efficacy of collecting receivables. Lower the ratio, more efficient the collection of receivables.

Calculate accounts receivables turnover ratio and days to collect for Company C for 2015 as follows:

Accounts receivableturnover for Company Cfor 2015} =Net salesAverage net accounts receivable=Net sales(Beginning net accounts receivable +Ending net accounts receivable)2=$44,300($3,940+$4,470)2=10.53 times

Days to collectCompany C for 2015} =365daysAccounts receivable turnover=36510.53 times=34.66 days

Thus, the accounts receivables turnover ratio and the number of days to collect the receivables for Company C for the year 2015 are 10.53 times and 34.66 days respectively.

Calculate accounts receivables turnover ratio and days to collect for Company C for 2014 as follows:

Accounts receivableturnover for Company Cfor 2014} =Net salesAverage net accounts receivable=Net sales(Beginning net accounts receivable +Ending net accounts receivable)2=$46,000($4,470+$4,870)2=9.9times

Days to collectCompany C for 2014} =365daysAccounts receivable turnover=3659.9 times=36.9days

Thus, the accounts receivables turnover ratio and the number of days to collect the receivables for Company C for the year 2014 are 9.9 times and 36.9 days respectively.

Calculate accounts receivables turnover ratio and days to collect for Company P for 2015 as follows:

Accounts receivableturnover for Company Pfor 2015} =Net salesAverage net accounts receivable=Net sales(Beginning net accounts receivable +Ending net accounts receivable)2=$63,100($6,440+$6,700)2=9.6times

Days to collectCompany P for 2015} =365daysAccounts receivable turnover=3659.6 times=38.0days

Thus, the accounts receivables turnover ratio and the number of days to collect the receivables for Company P for the year 2015 are 9.6 times and 38 days respectively.

Calculate accounts receivables turnover ratio and days to collect for Company P for 2014 as follows:

Accounts receivableturnover for Company Pfor 2014} =Net salesAverage net accounts receivable=Net sales(Beginning net accounts receivable +Ending net accounts receivable)2=$66,500($6,700+$7,000)2=9.7times

Days to collectCompany P for 2011} =365daysAccounts receivable turnover=3659.7 times=37.63days

Thus, the accounts receivables turnover ratio and the number of days to collect the receivables for Company P for the year 2014 are 9.7 times and 37.63 days respectively.

2.

Expert Solution
Check Mark
To determine

Identify the company which has quicker ability to convert its receivables into cash in 2015 and 2014.

Explanation of Solution

Identify the company which has quicker ability to convert its receivables into cash in 2015 and 2014.

ParticularsCompany CCompany P
 2014201520142015
Receivable turnover ratio9.9 times10.5 times9.7 times9.6 times
Days to collect ratio36.9 days34.6 days37.6 days38 days

Table (1)

A company which has higher receivables turnover ratio and lower days to collect the receivables is considered as the best company in converting its receivables to cash.

In 2014, Company C’s receivables turnover ratio is higher and days to collect is lower in comparison with Company P.

In 2015, Company C’s receivables turnover ratio is higher and days to collect is lower in comparison with Company P.

Therefore, Company C has the quicker ability to convert its receivables into cash in both the years.

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Chapter 8 Solutions

Fundamentals Of Financial Accounting

Ch. 8 - Does an increase in the receivables turnover ratio...Ch. 8 - What two approaches can managers take to speed up...Ch. 8 - When customers experience economic difficulties,...Ch. 8 - (Supplement 8A) Describe how (and when) the direct...Ch. 8 - (Supplement 8A) Refer to question 7. What amounts...Ch. 8 - 1. When a company using the allowance method...Ch. 8 - 2. When using the allowance method, as Bad Debt...Ch. 8 - 3. For many years, Carefree Company has estimated...Ch. 8 - 4. Which of the following best describes the...Ch. 8 - 5. If the Allowance for Doubtful Accounts opened...Ch. 8 - 6. When an account receivable is recovered a....Ch. 8 - Prob. 7MCCh. 8 - 8. If the receivables turnover ratio decreased...Ch. 8 - Prob. 9MCCh. 8 - Prob. 10MCCh. 8 - Prob. 1MECh. 8 - Evaluating the Decision to Extend Credit Last...Ch. 8 - Reporting Accounts Receivable and Recording...Ch. 8 - Recording Recoveries Using the Allowance Method...Ch. 8 - Recording Write-Offs and Bad Debt Expense Using...Ch. 8 - Determining Financial Statement Effects of...Ch. 8 - Estimating Bad Debts Using the Percentage of...Ch. 8 - Estimating Bad Debts Using the Aging Method Assume...Ch. 8 - Recording Bad Debt Estimates Using the Two...Ch. 8 - Prob. 10MECh. 8 - Prob. 11MECh. 8 - Recording Note Receivable Transactions RecRoom...Ch. 8 - Prob. 13MECh. 8 - Determining the Effects of Credit Policy Changes...Ch. 8 - Prob. 15MECh. 8 - (Supplement 8A) Recording Write-Offs and Reporting...Ch. 8 - Recording Bad Debt Expense Estimates and...Ch. 8 - Determining Financial Statement Effects of Bad...Ch. 8 - Prob. 3ECh. 8 - Recording Write-Offs and Recoveries Prior to...Ch. 8 - Prob. 5ECh. 8 - Computing Bad Debt Expense Using Aging of Accounts...Ch. 8 - Computing Bad Debt Expense Using Aging of Accounts...Ch. 8 - Recording and Reporting Allowance for Doubtful...Ch. 8 - Recording and Determining the Effects of Write-Off...Ch. 8 - Recording Note Receivable Transactions, Including...Ch. 8 - Recording Note Receivable Transactions, Including...Ch. 8 - Recording Note Receivable Transactions, Including...Ch. 8 - Using Financial Statement Disclosures to Infer...Ch. 8 - Using Financial Statement Disclosures to Infer Bad...Ch. 8 - Prob. 15ECh. 8 - Analyzing and Interpreting Receivables Turnover...Ch. 8 - (Supplement 8A) Recording Write-Offs and Reporting...Ch. 8 - Recording Accounts Receivable Transactions Using...Ch. 8 - Interpreting Disclosure of Allowance for Doubtful...Ch. 8 - Recording Notes Receivable Transactions Jung ...Ch. 8 - Accounting for Accounts and Notes Receivable...Ch. 8 - Analyzing Allowance for Doubtful Accounts,...Ch. 8 - Recording Accounts Receivable Transactions Using...Ch. 8 - Interpreting Disclosure of Allowance for Doubtful...Ch. 8 - Recording Notes Receivable Transactions CS...Ch. 8 - Accounting for Accounts and Notes Receivable...Ch. 8 - Analyzing Allowance for Doubtful Accounts,...Ch. 8 - Recording Accounts Receivable Transactions Using...Ch. 8 - Prob. 2PBCh. 8 - Prob. 3PBCh. 8 - Accounting for Accounts and Notes Receivable...Ch. 8 - Analyzing Allowance for Doubtful Accounts,...Ch. 8 - Recording and Reporting Credit Sales and Bad Debts...Ch. 8 - Prob. 2COPCh. 8 - Recording Daily and Adjusting Entries Using FIFO...Ch. 8 - Prob. 1SDCCh. 8 - Prob. 2SDCCh. 8 - Ethical Decision Making: A Real-Life Example You...Ch. 8 - Critical Thinking: Analyzing the Impact of Credit...Ch. 8 - Using an Aging Schedule to Estimate Bad Debts and...Ch. 8 - Accounting for Receivables and Uncollectible...
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