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.

The Campbell Soup Company manufactures and markets food products throughout the world. The following sales and receivable data

The Campbell Soup Company manufactures and markets food products throughout the world. The following sales and receivable data (in millions) were reported by Campbell Soup for two recent years:

                     Year 2 | Year 1

Sales                $8,082 | $8,268

Accounts receivable     647 |    670

Assume that the accounts receivable (in thousands) were $635 million at the beginning of Year 1.

a. Compute the accounts receivable turnover for Year 2 and Year 1. Round average accounts receivable to one decimal place and accounts receivable turnover to two decimal places.

b. Compute the days’ sales in receivables at the end of Year 2 and Year 1. Use 365 days and round to one decimal place.

c.  What conclusions can be drawn from these analyses regarding Campbell’s efficiency in collecting receivables?

Answer:

a. and b.

Sales.................................... 

Average accts. receivable...... 

Accts. receivable turnover...... 

Average daily sales............... 

Days’ sales in receivables...... 

The days’ sales in receivables could also be computed by dividing 365 days by

the accounts receivable turnover as follows:

Year 2: 29.7 (365 days ÷ 12.27) (Difference due to rounding)

Year 1: 28.8 (365 days ÷ 12.67) (Difference due to rounding)

c. The accounts receivable turnover indicates a decrease in the efficiency of  

collecting accounts receivable by decreasing from 12.67 to 12.27, an unfavorable 

change. The number of days’ sales in receivables increased from 28.7 to 29.8 days, 

also indicating an unfavorable change in collections of receivables. However, 

before a final conclusion can be reached, both ratios should be compared

with those of past years, industry averages, and similar firms.