Accounting 2

Accounts Receivable Turnover Ratios of Coca-Cola and Wal-Mart

The accounts receivable turnover ratio measures a firm 's effectiveness in collecting payments on goods and services it sold to customers on credit . A high A /R turnover ratio suggests that a firm is operating mostly on a cash basis , it has tight credit policy or efficient collection system for goods sold on credit . A low A /R turnover ratio may mean that the company has a loose credit policy and an inefficient collection effort . The ratio may be computed using this formula

A

/R Turnover Net Credit Sales / Average Accounts Receivable

Wal-Mart Stores and Coca-Cola are market leaders in their industries Retail giant Wal-Mart Stores recorded 378 ,799 ,000 ,000 in sales and 12 ,731 ,000 ,000 in profits , to be the world 's no . 1 company , by revenue according to Fortune Magazine 's Global 500 . Coca-Cola is 275th on the Fortune Global 500 and is tops among beverage company in the list with 28 ,859 ,000 ,000 in sales and 5 ,981 ,000 ,000 of profits for 2007

To compute and examine the A /R Turnover Ratio of the two companies , we will use their annual reports submitted to the Securities and Exchange Commission and shared to investors . Given that the two firms ' reports only show sales -- which account for both credit and cash sales -- we will use the net sales , instead of net sales on credit , to compute for the ratios . We will also assume that the account receivables for the end of 2006 and 2007 are the average accounts receivable for each year

Using A /R Ratio Net Sales / A /R , we will come up with these figures

Despite the disparities in their A /R Turnover ratios , with Coca-Cola having only a ratio of 8 .70 and Wal-Mart having 102 .5 , both firms have reasonable ratios

Wal-Mart

Wal-Mart Stores , Inc , operates retail stores in the United States Central and South America , Europe and Asia . Wal-Mart 's supercenters and discount stores largely sell merchandise through cash or credit card payments , which may be considered as liquid transactions because banks issuing those credit cards guarantee payments to merchants regardless if a consumer defaults on his credit card debt . In its annual report to the Securities and Exchange Commission , Wal-Mart said that payments from banks for credit and debit cards and electronic transactions are processed within 24 to 48 hours . Wal-Mart confirmed in its annual report that accounts receivable comprise of insurers ' dues for pharmacy sales marketing fees ' from suppliers , and credit card transactions that are classified as accounts receivables

Like Target , Sears and Kmart , Wal-Mart 's business requires that payment by cash or through credit card because of the volume of customers it has and the low prices of its merchandise on sale . General Motors Corp , for example , sells cars at above 10 ,000 per unit , hence , it offers installment payments , for a one-year , two-year or three-year period to customers . It would be impractical for Wal-Mart to offer...