Compare the accounts receivable turnover ratios for Coca-Cola and Wal-Mart. What characteristics of these companies would indicate that these ratios are reasonable?
To compare the accounts receivable turnover ratios for Coca-Cola and Wal-Mart, you would need to gather some financial data for both companies. Here's how you can do it:
1. Locate the latest financial statements: You can find the annual reports or 10-K filings of both Coca-Cola and Wal-Mart on their respective official websites. These reports contain important financial information, including details about accounts receivable.
2. Find the accounts receivable values: Look for the balance sheet section in the financial statements of both companies. Locate the "Accounts Receivable" or similar line item.
3. Calculate the accounts receivable turnover ratio: The accounts receivable turnover ratio measures how efficiently a company collects its receivables. Divide the net credit sales by the average accounts receivable. The formula is as follows:
Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable
Net credit sales are usually available in the income statement section of the financial statements.
For the average accounts receivable, add the beginning and ending accounts receivable balances and divide the sum by 2.
Now that you have the accounts receivable turnover ratio for both Coca-Cola and Wal-Mart, you can compare them. A higher ratio generally indicates that a company is collecting its receivables more quickly. However, to determine if these ratios are reasonable, you need to consider the characteristics of these companies. Here are some factors to consider:
1. Industry norms: Compare the accounts receivable turnover ratios of Coca-Cola and Wal-Mart to the industry average or similar companies in their respective industries. If their ratios are in line with the industry average, it suggests that their collection processes are reasonable.
2. Historical comparison: Analyze the trend of accounts receivable turnover ratios over multiple periods for both companies. If the ratios have been consistent or improving over time, it indicates a reasonable pattern.
3. Company-specific factors: Consider the nature of business operations, sales terms, and customer base for Coca-Cola and Wal-Mart. Different industries and business models may have varying collection periods. For instance, a company with a majority of cash sales will likely have a higher turnover ratio than one with a significant portion of credit sales.
By analyzing these characteristics, you can determine whether the accounts receivable turnover ratios for Coca-Cola and Wal-Mart are reasonable or not.