Accounts Receivable Turnover for Coca-Cola and PepsiCo The following information

Question

Accounts Receivable Turnover for Coca-Cola and PepsiCo
The following information was summarized from the 2006 annual report. The Coca Cola Company:
(In millions)
________________________________________________________________________
Trade accounts receivable, less allowances of $63 and $72, respectively
December 31, 2006 $2,587
December 31, 2005 2,281
Net operating revenues for the year ended December 31:
2006 24,088
2005 23,104

The following information was summarized from the 2006 annual report of PepsiCo:

(In millions)
________________________________________________________________________
Accounts and notes, receivable, net
December 30, 2006 $3,725
December 31, 2005 3,261
Net revenue for the year ended:
December 30, 2006 35,137
December 31, 2005 35,562

Required
1. Calculate the accounts receivable turnover ratios for Coca-Cola and PepsiCo for 2006.
2. Calculate the average collection period, in days, for both companies for 2006. Comment on the reasonableness of the collection periods for these companies considering the nature of their business.
3. Which company appears to be performing better? What other information should you consider in determining how these companies are performing?

Explanation / Answer

1. Calculate the accounts receivable turnover (ART) ratios for Coca-Cola and PepsiCo for 2006. ART = Net Credit Sales Coca-Cola (2006) in millions PepsiCo (2006) in millions Average Accounts Net Sales $24,088 Net Sales $35,137 Receivable (AAR) AAR $2,434.0 AAR $3,493.0 ART = 9.9 ART = 10.1 2. Calculate the average collection period, in days, for both companies for 2006. Comment on the reasonableness of the collection periods for these companies considering the nature of their business. If I assume 360 days per year: Coca-Cola 360/9.1 = 40 days PepsiCo 360/10.1 = 36 days Coca-Cola turns over its accounts receivable every 40 days; PepsiCo every 36 days. Given the nature of their respective businesses - namely production, distribution, and sales of beverages - these figures indicate that both companies have reasonable collection periods that are neither too slow, resulting in missed opportunities with cash that isn't available, nor too fast, resulting in lost sales from stringent credit policies. 3. Which company appears to be performing better? What other information should you consider in determining how these companies are performing? PepsiCo appears to be performing better than Coca-Cola Company because it is turning over its accounts receivable slightly faster. Both companies should compare their accounts receivable turnover ratios with prior years to see if collections are faster or slower and they should compare their ratios with other companies in the same industry.

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