Question

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

Accounts Reivable Turnover Ratio = Net credit salesAverage Accounts receivables

Houston House :

Net credit sales = 46980+400232 = 43502

Average accounts receivables = 1968+6422 = 1305

Accounts receivable turnover ratio = 435021305 = 33times

Average collection period = 365Accounts receivable turnover ratio

= 36533 =11days

Whitney Holdings:

Net credit sales = 4335+42512 = 4293

Average accounts receivables = 246+2642 = 255

Account receivable turnover ratio = 4293255 = 16.83times

Average collection period = 365Accounts receivable turnover ratio

= 36516.83

= 22days

Comparing to the Accounts receivable turnover ratio and Average collection period company Houston House is performing better compare to the company Whitney because Average collection period lower.