Question

Accounts Receivable Turnover for Morningstar

The 2015 annual report of Morningstar (the maker of Circus-o's and Crunch'ems) reported the following amounts (in millions of dollars):

Revenues, for the year ended May 31, 2015	$15,690
Accounts receivable, net, May 31, 2015	953
Accounts receivable, net, May 31, 2014	1,082

Required:

1. Compute Morningstar’s accounts receivable turnover ratio for the year ended May 31, 2015. Assume that all sales are on credit. Round your answer to two decimal places.
times

2. What is the average collection period in days for an account receivable. (assuming 360 in a year) Round the final answer to the nearest number.
days

3a. Which of the following would be the types of customers that Morningstar would have:

1. Grocery wholesalers
2. Grocery chains
3. Institutional food services
4. All of the above

3b. Select the answer that would be helpful to determine if the average collection period for sales is reasonable:

1. Industry comparisons
2. Prior years comparisons
3. Credit terms
4. All of the above would be helpful

Answer 1

Given - Revenue - $15690

Opening Account receivable(May,2014) = 1082

Closing Account receivalbe( May 2015) = 953

Average Account receivable = = 1017.5

a) Accounts receivalbe turonver : Net Credit Sales/Turnover/Revenue divided by Avg Account receivable

Assuming all sales on credit.

So,

Morningstar’s accounts receivable turnover ratio for the year ended May 31, 2015 is  15.42 times.

b) Average Collection period = 360 Divided by Avg Turnover ratio

So

c) Among all the options C would better decribe the type of customer the Morning Star is.

Reason being that Grocerry chain and Grocerry stores sell goods on cash basis so their is not point for that the average collection period is 23 days or revenue on Credit. Only Institutional Food services type of organisation which is providing catering services to various type of institute could sell first on Credit basis and receive payments after some days. So most appropriate ans would be C.

d) The answer of this part is d i.e. All of the above options. Organisation need to compare its collection period with all metrics.

1. Industry Comparisons: It is most commonely and widely used comparison as what peer's/idustry's collection period is important for any type of organisatio to evaluate its financial position and long term sustanability in the market. This is generally for newly entered companies.

2. Prior period analysis is also the important factor to consider and to evaluate the progress of the organaisation. comparing with the past years, If there is regular increase in Collection period then there must be piling of debtors whose payment is pending for long and you might end up losing the money. And if there is regular decrease in collection period then it means you are not providing sufficient credit period to customer which might result in losing the customer to those companies who are providing sufficient credit period.

3. Credit terms includes period at which the customer has to pay the amount after providing goods or services. Ignoring and delay in receving of payments could be harmful for working capital of organisation and it could go out of the cash. So regular monitoring and comparing the collection period with Credit terms must be the part of recurring activities.