In: Accounting
solution:-
Nike has accounting year ending with MAY 31(JUN 1 to MAY 31)
Under Armour has accounting year ending with DECEMBER 31 (JANUARY 1 to DECEMBER 31).
It is given that for both the companies ,shipments i.e departure of items to sporting goods retailers occur mostly in the month of December and both the companies offer 60 day credit terms to retailers i.e retailers can pay their bills payable to NIKE and UNDER ARMOUR upto 60 days without incurring any penalties, fines and interest.
now we have to find whether NIKE have higher or lower accounts receivable turnover and higher or lower days to collect than UNDER ARMOUR.
What is Accountable Receivable Turnover ?
A) it is the number of times per year that a business collects its average accounts receivable.
*accounts receivable = net credit sale divided by (opening account receivable + closing account receivable) / 2.
Here closing account receivable means account receivable as on MAY 31 for NIKE. It is given that more shipments occur at December month. So, by reckoning 60 days credit period from 31 December such credit period shall expire by approximately by the month ending of February of succeeding year. So,most of the sports retailers who received shipment from Nike in the month of December tend to pay off their liability almost before month ending of February. Hence because of this NIKE would have comparatively less opening and closing account receivables.
since remaining other things being equal as mentioned in the question now opening and closing receivables(denominator in the formula) are determinant factors.
As they are less for NIKE hence overall fraction will be more i.e average accounts receivable is inversely related to accounts receivable figure. Hence NIKE will have more accounts receivable.
(2) Whether NIKE have Higher or Lower days to collect than Under Armour ?
A) if account receivable turnover ratio is X, then business collects its account receivable X times in year. i.e business having more accounts receivable turnover ratio would have such number of times to collect its account receivable. when it comes to days available to collect its account receivable , businesses having more frequency will have less days and vice versa.This can be well explained with the help of following illustration.
take net credit sales as 100000 (being equal for both of the above companies).
And average accounts receivable as 20000 for NIKE and 25000 UNDER ARMOUR. Now Accounts receivable turnover for NIKE AND U.ARMOUR is 5 and 4 respectively. Here NIKE has more accounts receivable.
let us find number days to collect.Formula to find days to collect is 365 / accounts receivable turnover.
NIKE 365/5 = 73 days. incase of UNDER ARMOUR 365/4 = 91.25 days.
From the above it is clearly evident that more accounts = less days to collect.In the given case NIKE has more higher accounts receivable and lower days to collect to than UNDER ARMOUR.
NOTE:- Here in the case of under armour, closing and opening accounts receivables are comparatively more than NIKE because of its financial year ending on DECEMBER 31 and more shipments in the same month and credit period expires on February month.
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