Question

Continuing Company Analysis—Amazon: Accounts receivable turnover and number of days' sales in receivables

REAL WORLD

Amazon.com is one of the largest Internet retailers in the world. Best Buy, Inc. is a leading retailer of consumer electronics and media products in the United States. Amazon and Best Buy compete in similar markets; however, Best Buy sells through both traditional retail stores and the Internet, while Amazon sells only through the Internet. Sales and accounts receivable information for both companies for a recent period follows (in millions):

	Amazon	Best Buy
Sales	$88,988	$40,339
Accounts receivable:
Beginning of year	4,767	1,308
End of year	5,612	1,280

1. Determine the accounts receivable turnover for each company. (Round all calculations to one decimal place.)

2. Determine the number of days' sales in receivables for each company. (Round all calculations to one decimal place.)

3. Evaluate the relative efficiency in collecting accounts receivables between the two companies and discuss this analysis.

4. What might explain this difference? Further, why is it important to have efficiency in collecting on the outstanding accounts receivables?

Answer 1

3.

1 Accounts Receivable Turnover Accounts Receivable Turnover = Net Annual Credit Sales Average Inventory Best Buy Amazon $88,988.00 $ 40,339.00 Sales Accounts receivable Beginning of the year End of year 4,767.00 $ 1,308.00 5,612.00 $ 1,280.00 5,189.50 $ 1,294.00 Accounts Receivable Turnover 17.1477021 31.17387944 Average Inventory 2 Number of days' sales in receivable Number of days' sales in receivable Number of days Accounts Receivable Turnover Ratio Best Buy Amazon Number of days in a year Accounts Receivable Turnover Ratio Number of days' sales in receivable 365 days 365 days 17.1 31.2 21.3450292 11.69871795 11.7 days Number of days' sales in receivable 21.3 days

Best Buy Inc. is more efficient in collecting its accounts receivable as it is able to collect its receivable are collected in 11.7 days of affecting the sales whereas Amazon is able to collect its accounts receivable only after 21.3 days days of sales.

The company that is able to collect its receivables in minimum possible time frame will be in a better position because it will be able to convert its accounts receivable into cash as early as possible and avoid situations of cash shortage / cash crunch in an organization. This will also reduce the percentage of bad debts in comparison with the company having longer accounts receivable collection period.

4.

Accounts receivable management allows you to notice the warning signs that could indicate potential payment issues so you can stem the bleeding before it hurts your business. You can conduct financial planning accurately because you can effectively estimate future accounts receivable, and you get to make good use of working capital to grow your business. Furthermore, accounts receivable management ensures that your business runs at peak operational efficiency, with no financial issues to slow down your growth. Therefore , it is important to manage the collection of the outstanding accounts receivables