Question

Suppose the following information was taken from the 2017 financial statements of FedEx Corporation, a major global transportation/delivery company.

(in millions)		2017		2016
Accounts receivable (gross)		$ 3,839		$ 4,712
Accounts receivable (net)		3,133		4,536
Allowance for doubtful accounts		706		176
Sales revenue		38,387		38,915
Total current assets		6,692		6,915

Answer each of the following questions.

(a)

Calculate the accounts receivable turnover and the average collection period for 2017 for FedEx Corporation. (Round answers to 1 decimal place, e.g. 12.5. Use 365 days for calculation.)

Accounts receivable turnover		enter the accounts receivable turnover in times rounded to 1 decimal place	times
The average collection period for 2017		enter the average collection period for 2017 in days rounded to 1 decimal place	days

Answer 1

Accounts receivable turnover is an efficiency ratio.

It helps in measuring the company's ability to issue credit to its customers and also collect them. In short, the ratio determines the number of times the company collects accounts receivable over a certain period of time.

1) account receivable turnover = net credit sales / average account receivables .

net credit sales = sales - cash sales - sales return.

( only credit sales are included, as cash sales don't create any receivables. )

average account receivables =

receivables at the beginning of the year + receivables at the end of the year/2

2) average collection period = 365 / account receivables turnover ratio =

365 * account receivables / credit sales .

this shows the average number of days required to make the collection from the debtor of the invoiced credit sale. ( i.e., average no. of days between credit sale and its payment received. )

Here, in the given question

Average receivable turnover = 38387 / 3834.5 = 10.0 times

Here, only sales revenue is mentioned and no cash sale or returns is provided, to calculate credit sales. Thus, we take the given sales revenue to make calculations.

average account receivable = 4536 + 3133 / 2 = 3834.5

( net account receivables = gross account receivable - bad debts allowance ) . Anyway, the net receivables are already given .

• closing balance of 2016 is the opening balance of 2017, i.e., receivables at the beginning of the year.
• closing balance of 2017 is receivables at the end of the year.

Average collection period = 365 / 10 = 36.5 days.

This means, the company collects its receivables about 10 times a year and once every 36.5 days.