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A – M: Calculate the accounts receivable turnover and the average collection period ratio for The Coca-Cola Company for the most current year presented. Explain what the results indicate about the company. Summarize how well Coca-Cola is collecting on its receivables based upon the type(s) of products it sells and the industry in which it competes. Justify your speculation by using supporting facts from the income statement, balance sheet, or other resources.
Textbook: Young, S. D., Cohen, J., & Bens, D. A. (2019). Corporate financial reporting and analysis: A global perspective (4th ed.). Wiley. ISBN-13: 9781119494577. +800 words
The receivables turnover ratio and the average collection period ratio are two important financial metrics which can help assess the effectiveness of a company’s accounts receivables management. The Coca-Cola Company (KO) is one of the largest beverage companies in the world, with over 500 brands in 200 countries. As such, it has a very large amount of accounts receivable to manage. In order to determine how well KO is managing its accounts receivable, we need to calculate its receivables turnover ratio and average collection period ratio for the most recent year presented.
To calculate KO’s Receivables Turnover Ratio (RTR) for the most current year presented, we must first look at both their income statement and balance sheet. On their income statement, total net sales can be found under “Total Revenues” and on their balance sheet totals can be found under “Accounts Receivable – Trade”. Using these numbers, we can then use this formula to find our RTR:
RTR = Total Net Sales / Accounts Receivable – Trade
For 2019: $31,945 million / $3,107 million = 10.29 times/year
To calculate KO’s Average Collection Period (ACP) Ratio for the most current year presentted again use both their income statement and balance sheet numbers as listed above but instead use this formula: ACP = 365 days/ RTR For 2019: 365 days/ 10.29 times/year= 35 days
The results from these calculations indicate that The Coca-Cola Company had an RTR of 10.29 times per year during 2019 which indicates that they were able to turn around almost 1 sale per day for every dollar in trade account receivables they held throughout that year; meaning they were collecting payments owed them more quickly than some other businesses might have been able to do so – a good sign considering they compete against many other beverage companies worldwide! Additionally, their ACP was only 35 days which further suggests that they are efficiently collecting money due them relatively quickly when compared with industry peers who may take much longer to collect money owed them by customers or clients each month or quarter – a plus as far as cash flow goes!
Given that The Coca-Cola Company mainly sells consumable goods (e.g.., beverages), it stands to reason why they would want customers making timely payments on what is essentially “perishable” inventory – something other firms do not necessarily have too worry about since not all products sold may go bad if unpaid monies linger longer than anticipated months down the line! Thus far it seems that KO has been doing quite well when it comes time collecting payments from those buying its products given how fast its ACP was during 2018; though future comparisons will better provide insight into whether or not this trend holds up over time or if there is any room for improvement going forward should certain circumstances arise unexpectedly in coming years.