H.J. Heinz Company was founded in 1869 at Sharpsburg, Pennsylvania, by Henry J. Heinz. The company manufactures and markets food products

H.J. Heinz Company was founded in 1869 at Sharpsburg, Pennsylvania, by Henry J. Heinz. The company manufactures and markets food products throughout the world, including ketchup, condiments and sauces, frozen food, pet food, soups, and tuna. For two recent years, H.J. Heinz reported the following (in thousands):



Year 2 Year 1
Net sales $10,706,588 $10,494,983
Accounts receivable 1,265,032 1,045,338



Assume that the accounts receivable (in thousands) were $1,171,797 at the beginning of Year 1.

a. Compute the accounts receivable turnover for Year 2 and Year 1. Round to one decimal place.
b. Compute the days’ sales in receivables at the end of Year 2 and Year 1. Round to one decimal place.
c. What conclusions can be drawn from these analyses regarding Heinz’s efficiency in collecting receivables?


Answer:
 

a. and b.
Net sales……………………………
Accounts receivable………………
Average accts. receivable………
Accts. receivable turnover………
Average daily sales………………
Days’ sales in receivables………
Year 2 Year 1
$10,706,588 $10,494,983
$1,265,032 $1,045,338
$1,155,185 $1,108,567.5
[($1,265,032 + $1,045,338) ÷ 2] [($1,045,338 + $1,171,797) ÷ 2]
9.3 9.5
($10,706,588 ÷ $1,155,185) ($10,494,983 ÷ $1,108,567.5)
$29,333.1 $28,753.4
($10,706,588 ÷ 365 days) ($10,494,983 ÷ 365 days)
39.4 38.6
($1,155,185 ÷ $29,333.1) ($1,108,567.5 ÷ $28,753.4)



c. The accounts receivable turnover indicates a decrease in the efficiency of collecting accounts receivable by decreasing from 9.5 to 9.3, an unfavorable trend. The number of days’ sales in receivables increased from 38.6 to 39.4 days, also indicating an unfavorable trend in collections of receivables. These unfavorable trends are consistent with the economic downturn that occurred worldwide in Year 1 and Year 2. However, before reaching a final conclusion, both ratios should be compared with those of past years, industry averages, and similar firms.



Use the data in Exercises 9-27 and 9-28 to analyze the accounts receivable turnover ratios of H.J. Heinz Company and The Limited Brands Inc.

a. Compute the average accounts receivable turnover ratio for The Limited Brands Inc. and H.J. Heinz Company for the years shown in Exercises 9-27 and 9-28.
b. Does The Limited Brands or H.J. Heinz Company have the higher average accounts receivable turnover ratio?
c. Explain the logic underlying your answer in (b).


Answer:
a. The average accounts receivable turnover ratios are as follows:
The Limited Brands Inc.: 34.0 [(37.3 + 30.7) ÷ 2]
H.J. Heinz Company: 9.4 [(9.3 + 9.5) ÷ 2]
Note: For computations of the individual ratios, see Ex. 9–27 and Ex. 9–28.

b. The Limited Brands has the higher average accounts receivable turnover ratio.

c. The Limited Brands operates a specialty retail chain of stores that sell directly to individual consumers. Many of these consumers (retail customers) pay with MasterCards or VISAs that are recorded as cash sales. In contrast, H.J. Heinz manufactures processed foods that are sold to food wholesalers, grocery store chains, and other food distributors that eventually sell Heinz products to individual consumers. Accordingly, because of the extended distribution chain, we would expect Heinz to have more accounts receivable than The Limited Brands. In addition, we would expect Heinz’s business customers to take a longer period to pay their receivables. Thus, we would expect Heinz’s average accounts receivable turnover ratio to be lower than The Limited Brands, as shown in (a).