Question

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?

Answer 1

	Houston House	Whitney Holdings
Accounts Receivable Turnover ratio	36	17
Average collection period, in days	10 Days	21 Days

Requirement – 1 Accounts Receivable Turnover ratio

Accounts Receivable Turnover ratio = Net Sale or Revenue / Average Accounts Receivables

Houston House

= $46,980 / [ (1,968 + 642 ) / 2 ]

= $46,980 / 1,305

= 36

Whitney Holdings

= $4,335 / [ (246 + 264 ) / 2 ]

= $4,335 / 255

= 17

Requirement – 2 Average collection period, in days

Average collection period, in days = 365 Days / Accounts Receivable Turnover ratio

Houston House

= 365 Days / 36

= 10 Days ( Rounded to 0 Decimal)

Whitney Holdings

= 365 Days / 17

= 21 Days ( Rounded to 0 Decimal)

Requirement – 3 Which company appears to be performing better?

Houston House is appears to be performing better Since it has the higher Accounts Receivable Turnover ratio. A high Accounts Receivable Turnover ratio means that the companies are collecting accounts receivables on a timely manner and therefore higher ratio would be more favorable