Use the data in Exercises 9-27 and 9-28 to analyze the accounts receivable turnover ratios of the Campbell Soup Company and American Eagle Outfitters, Inc.

Use the data in Exercises 9-27 and 9-28 to analyze the accounts receivable turnover ratios of the Campbell Soup Company and American Eagle Outfitters, Inc.

a. Compute the average accounts receivable turnover ratio for Campbell Soup and American Eagle for the years shown in Exercises 9-27 and 9-28.

b.  Does Campbelll Soup or American Eagle have the higher average accounts receivable turnover ratio?

c.  Explain why the average turnover ratios are different in (b).

Answer:

a. The average accounts receivable turnover ratios are as follows:

Campbell Soup:  12.47   [(12.27 + 12.67) ÷ 2]

American Eagle Outfitters:  46.76   [(47.28 + 46.24) ÷ 2]

Note:  For computations of the individual ratios, see Ex. 9-27 and Ex. 9-28.

b. American Eagle Outfitters has the higher average accounts receivable turnover ratio.

c. American Eagle Outfitters operates a specialty retail chain of stores that sells directly to individual consumers. Many of these consumers (retail customers) pay using MasterCard or VISA, which is recorded as cash sales. In contrast, Campbell Soup manufactures foods that are sold to food wholesalers, grocery store chains, and other food distributors that eventually sell Campbell’s products to individual consumers. Accordingly, because of the extended distribution chain, we would expect Campbell Soup to have more accounts receivable than American Eagle. In addition, we would expect Campbell’s business customers to take a longer period to pay their receivables. Thus, we would expect Campbell’s average accounts receivable turnover ratio to be lower than American Eagle, as shown in a.