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In: Accounting

SECTION A: FINANCIAL ACCOUNTING Question 1 &n

SECTION A: FINANCIAL ACCOUNTING

Question 1 [10 marks]

Houston House (Pty) Ltd and Whitney Holdings are competitors in the same industry.

The following information was summarised from a recent annual report of Houston House (Pty) Ltd

(In millions)

Receivables:

December 31, 2015 R 1,968

December 31, 2014 642

Revenue for the year ended:

December 31, 2015 46,980

December 31, 2014 40,023

The following information was summarised from a recent annual report of Whitney Holdings:

(In millions)

Accounts and notes receivable, net

December 31, 2015 R 246

December 31, 2014 264

Revenues for the year ended:

December 31, 2015 4,335

December 31, 2014 4,251

Required:

1. Calculate the accounts receivable turnover ratios for Houston House and Whitney Holdings for the most recent year.

2. Calculate the average collection period, in days, for both companies for the most recent year. Comment on the reasonableness of the collection periods for these companies considering the nature of their business.

3. Which company appears to be performing better? What other information should you consider in determining how these companies are performing?

Expert Solution

		Houston House	Whitney Holdings
	Receivables for Dec 31, 2014	642	264
	Receivables for Dec 31, 2015	1968	246
	Average Accounts Receivable	1305	255
	Revenue for Dec 31,2015	46980	4335
1	Accounts Receivable Turnover= Net Sales / Average Accounts Receivabble	36	17
2	Average Collection period = 365/ Accounts Receivable Turnover Ratio	10.14	21.47

3. Looking at the average collection period, Houston House collects payment in 10 days while Whitney Holdings collects payment in 21 days. Considering both companies are from the same industry, Houston house is doing a better job of collecting the accounts receivables. Houston house has business 10 times the size of Whitney holdings. Houstaon house is definetly performing better based on the collection period and turnover rati. Othe than the above other information that shuld be considered is as follows:

1. Profitability

2. Current Ratio

3. Quick ratio

4. ROE

5. Dividend Payout and Growth

6. Inventory Turnover Ratio

ekkarill92 answered 1 year ago

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