ATC 7-3 Real-World Case: Time Needed to Collect Accounts Receivable

Accounting for Receivables

ATC 7-3 Real-World Case: Time Needed to Collect Accounts Receivable

The following are the average days to collect accounts receivable for four companies in different industries. The data is from 2016.

Required

Write a brief memorandum providing possible answers to the following questions:

a. Why would a company that manufactures and sells airplanes (Boeing) and a company that manufactures and sells automobiles (General Motors) collect their accounts receivables in such relatively short times?
b. Why would a company that sells furniture (Ethan Allen) collect its receivables much quicker than a company that sells toothpaste and soap (Colgate-Palmolive)?

ATC 7-4 Business Applications Case: Performing Ratio Analysis Using Real-World Data

The following data were taken from Hershey Foods Corporation’s 2016 annual report. All amounts are in thousands.

Required

a. Compute Hershey’s accounts receivable turnover ratios for 2016 and 2015.
b. Compute Hershey’s average days to collect accounts receivables for 2016 and 2015.
c. Based on the ratios computed in Requirements a and b, did Hershey’s performance improve or worsen from 2015 to 2016?
d. Assume it took Hershey 30 days to collect its receivables. Using an interest rate of 3.0 percent, calculate how much it cost Hershey to finance its receivables for 30 days in 2016.

ATC 7-5 Business Applications Case: Performing Ratio Analysis Using Real-World Data

AutoZone, Inc. claims to be the nation’s leading auto parts retailer, selling replacement auto parts directly to consumers. BorgWarner, Inc. manufactures automobile parts like transmissions and cooling systems for vehicle manufacturers worldwide. The following data were taken from the companies’ 2016 annual reports. All amounts are in thousands.

Required

a. Before performing any calculations, speculate which company will take the longest to collect its accounts receivable. Explain your rationale.
b. Calculate the accounts receivable turnover ratios for AutoZone and BorgWarner.
c. Calculate the average days to collect accounts receivable for AutoZone and BorgWarner.
d. Do the calculations from Requirements b and c confirm your speculations in Requirement a?

ATC 7-6 Writing Assignment: Cost of Charge Sales

Paul Smith is opening a plumbing supply store in University City. He plans to sell plumbing parts and materials to both wholesale and retail customers. Because contractors (wholesale customers) prefer to charge parts and materials and pay at the end of the month, Paul expects he will need to offer charge accounts. He plans to offer charge sales to wholesale customers only and require retail customers to pay with either cash or credit cards. Paul is wondering what expenses his business would incur relative to the charge sales and the use of credit cards.

Required

a. What issues will Paul need to consider if he allows wholesale customers to buy plumbing supplies on account?
b. Write a memo to Paul Smith outlining the potential cost of accepting charge customers. Discuss the difference between the allowance method for uncollectible accounts and the direct write-off method. Also, discuss the cost of accepting credit cards.