Based on the information in these financial statements from Amazon and Walmart, compute the ratios for each company for accounts receivable turnover and average collection period of receivables.
https://education.wiley.com/content/Weygandt_Accounting_Principles_14e/media/simulations/hidden/app/WKK_AP14e_AppE_Final.pdf
https://education.wiley.com/content/Weygandt_Accounting_Principles_14e/media/simulations/hidden/app/WKK_AP14e_AppD_Final.pdf
This essay aims to analyze the financial statements of two retail giants, Amazon and Walmart, by calculating two essential liquidity ratios – accounts receivable turnover and average collection period of receivables. These ratios provide insights into the companies’ efficiency in managing their receivables and their ability to collect cash from customers. The data for this analysis is based on the financial statements provided in the links mentioned above.
The accounts receivable turnover ratio measures how efficiently a company is managing its credit sales and collecting payments from customers. It is calculated by dividing net credit sales by the average accounts receivable during a specific period.
Accounts Receivable Turnover = Net Credit Sales / Average Accounts Receivable
Let’s first calculate the accounts receivable turnover ratio for both Amazon and Walmart based on the information provided in their respective financial statements.
According to the provided financial statements, Amazon’s net credit sales for the year amounted to $285,426 million, and the average accounts receivable for the same period were $16,398 million.
Accounts Receivable Turnover = $285,426 million / $16,398 million ≈ 17.40 times
From the financial statements, Walmart’s net credit sales for the year were $559,151 million, and the average accounts receivable were $9,417 million.
Accounts Receivable Turnover = $559,151 million / $9,417 million ≈ 59.38 times
Comparing the accounts receivable turnover ratio of Amazon and Walmart, we observe that Walmart has a significantly higher ratio than Amazon. This indicates that Walmart is more efficient in collecting payments from its customers in comparison to Amazon. A higher turnover ratio generally suggests that Walmart is more effective in managing its credit sales and converting receivables into cash.
The average collection period of receivables represents the average number of days it takes for a company to collect payments from its customers. It is calculated by dividing the number of days in the period by the accounts receivable turnover ratio.
Average Collection Period = 365 days / Accounts Receivable Turnover
Now, let’s calculate the average collection period for both Amazon and Walmart.
Amazon
Average Collection Period = 365 days / 17.40 ≈ 20.98 days
Walmart
Average Collection Period = 365 days / 59.38 ≈ 6.14 days
Analysis of Average Collection Period:
The average collection period for Amazon is approximately 20.98 days, while for Walmart, it is around 6.14 days. A lower average collection period indicates that Walmart is quicker in collecting payments from its customers compared to Amazon. This suggests that Walmart has more efficient credit and collection policies, leading to a faster conversion of receivables into cash.
In conclusion, analyzing the accounts receivable turnover and average collection period of Amazon and Walmart provides valuable insights into their liquidity and efficiency in managing their credit sales and receivables. Walmart outperforms Amazon in both ratios, indicating that it has better credit management practices and is more effective in converting receivables into cash. However, it’s important to consider other financial metrics and factors before making any investment decisions, as financial performance should be evaluated comprehensively.
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