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
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:
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
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?
Requirement – 1 Accounts Receivable Turnover ratio
Accounts Receivable Turnover ratio = Net Sale or Revenue / Average Accounts Receivables
= $46,980 / [ (1,968 + 642 ) / 2 ]
= $46,980 / 1,305
= $4,335 / [ (246 + 264 ) / 2 ]
= $4,335 / 255
Requirement – 2 Average collection period, in days
Average collection period, in days = 365 Days / Accounts Receivable Turnover ratio
= 365 Days / 36
= 10 Days ( Rounded to 0 Decimal)
= 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
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