Question

Cola Inc. and Soda Co. 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).

	Cola Inc.										Soda Co.
Fiscal Year Ended:	2015			2014			2013				2015			2014			2013
Net Sales	$	31,719		$	27,190		$	28,444			$	53,948		$	39,732		$	39,751
Accounts Receivable		4,408			3,743			3,071				6,397			4,644			3,714
Allowance for Doubtful Accounts		41			48			44				137			83			63
Accounts Receivable, Net of Allowance		4,367			3,695			3,027				6,260			4,561			3,651

Required:

1. Calculate the receivables turnover ratios and days to collect for Cola Inc. and Soda Co. for 2015 and 2014. (Use 365 days in a year. Do not round intermediate calculations on Accounts Receivable Turnover Ratio. Round your final answers to 1 decimal place. Use final rounded answers from Accounts Receivable Turnover Ratio for Days to Collect ratio calculation.)

2. Which of the companies is quicker to convert its receivables into cash?

• Soda Co.

• Cola Inc.

Answer 1

Answer to Requirement 1:

Cola Inc.:

2015:

Average Accounts Receivable = (Accounts Receivable, 2015 + Accounts Receivable, 2014) / 2
Average Accounts Receivable = ($4,367 + $3,695) / 2
Average Accounts Receivable = $4,031

Receivable Turnover Ratio = Net Sales / Average Accounts Receivable
Receivable Turnover Ratio = $31,719 / $4,031
Receivable Turnover Ratio = 7.87 times

Days to Collect = 365 / Receivable Turnover Ratio
Days to Collect = 365 / 7.87
Days to Collect = 46.38 days

2014:

Average Accounts Receivable = (Accounts Receivable, 2014 + Accounts Receivable, 2013) / 2
Average Accounts Receivable = ($3,695 + $3,027) / 2
Average Accounts Receivable = $3,361

Receivable Turnover Ratio = Net Sales / Average Accounts Receivable
Receivable Turnover Ratio = $27,190 / $3,361
Receivable Turnover Ratio = 8.09 times

Days to Collect = 365 / Receivable Turnover Ratio
Days to Collect = 365 / 8.09
Days to Collect = 45.12 days

Soda Co.:

2015:

Average Accounts Receivable = (Accounts Receivable, 2015 + Accounts Receivable, 2014) / 2
Average Accounts Receivable = ($6,260 + $4,561) / 2
Average Accounts Receivable = $5,410.50

Receivable Turnover Ratio = Net Sales / Average Accounts Receivable
Receivable Turnover Ratio = $53,948 / $5,410.50
Receivable Turnover Ratio = 9.97 times

Days to Collect = 365 / Receivable Turnover Ratio
Days to Collect = 365 / 9.97
Days to Collect = 36.61 days

2014:

Average Accounts Receivable = (Accounts Receivable, 2014 + Accounts Receivable, 2013) / 2
Average Accounts Receivable = ($4,561 + $3,651) / 2
Average Accounts Receivable = $4,106

Receivable Turnover Ratio = Net Sales / Average Accounts Receivable
Receivable Turnover Ratio = $39,732 / $4,106
Receivable Turnover Ratio = 9.68 times

Days to Collect = 365 / Receivable Turnover Ratio
Days to Collect = 365 / 9.68
Days to Collect = 37.71 days

Answer to Requirement 2:

Cola Inc. is quicker to convert its receivables into cash than Soda Co.