EX 9-27 Accounts receivable turnover and days’ sales in receivables

H.J. Heinz Company was founded in 1869 at Sharpsburg, Pennsylvania, by Henry J. Heinz. The company manufactures and markets food products throughout the world, including ketchup, condiments and sauces, frozen food, pet food, soups, and tuna. For the fiscal years 2009 and 2008, H.J. Heinz reported the following (in thousands):

                                                                            Year Ending 
                                                           April 29, 2009     April 30, 2008 
Net sales                                              $10,148,082         $10,070,778 
Accounts receivable                               1,171,797              1,161,481 

Assume that the accounts receivable (in thousands) were $996,852 at the beginning of fiscal year 2008. 
a. Compute the accounts receivable turnover for 2009 and 2008. Round to one decimal place. 
b. Compute the days’ sales in receivables at the end of 2009 and 2008. Round to one decimal place. 
c. What conclusions can be drawn from these analyses regarding Heinz’s efficiency in collecting receivables?

Answer:
a. and b.
a. and b.  2009   2008    Net sales............................... $10,148,082  $10,070,778  Accounts receivable............ $1,171,797  $1,161,481  Average accts. receivable... $1,166,639  $1,079,166.5   [($1,171,797 + $1,161,481)/2] [($1,161,481 + $996,852)/2]  
 Accts. receivable turnover  8.7 9.3   ($10,148,082/$1,166,639) ($10,070,778/$1,079,166.5)  
 Average daily sales............. $27,803.0 $27,591.2   ($10,148,082/365) ($10,070,778/365)  
 Days’ sales in receivables .. 42.0 39.1   ($1,166,639/$27,803.0) ($1,079,166.5/$27,591.2) 

c. The accounts receivable turnover indicates an decrease in the efficiency of collecting accounts receivable by decreasing from 9.3 to 8.7, an unfavorable trend. The number of days’ sales in receivables increased from 39.1 to 42.0 days, also indicating an unfavorable trend in collections of receivables. These unfavorable trends are consistent with the economic downturn that occurred worldwide in 2008 and 2009. However, before reaching a final conclusion, both ratios should be compared with those of past years, industry averages, and similar firms.

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