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): Best Amazon Buy $88,988 $40,339 Sales Accounts receivable: Beginning of year End of year 4,767 5,612 1,308 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.) Evaluate the relative efficiency in collecting accounts receivables between the two companies and discuss this analysis. What might explain this difference? Further, why is it important to have efficiency in collecting on the outstanding accounts receivables?

Answer 1

		Amazon	Best Buy
	Sales	$88,988	$40,339
	Average Receivables	(Receivables at beginning of year+Receivables at end of year)/2
	Average Receivables	(4767+5612)/2	(1308+1280)/2
	Average Receivables	$5,189.5	$1,294
1	Account receivable turnover	Sales/Average account receivables
		(88,988/5,189.5)	(40,339/1294)
	Account receivable turnover	17.1	31.2
2	Days' sales in receivable	365/Account receivable turnover
		365/17.15	365/31.17
	Days' sales in receivable	21.3	11.7
3	The day's sales receivable of the Best Buy is low as compared to Amazon which implies that Best Buy
	is relatively more efficient in collecting account receivable from the customers.
	The days sales outstanding formula shows investors and creditors how well companies’ can collect cash from their customers. This ratio measures the number of days it takes a company to convert its sales into cash. A lower ratio is more favorable because it means companies collect cash earlier from customers and can use this cash for other operations. It also shows that the accounts receivables are good and won’t be written off as bad debts.
	A higher ratio indicates a company with poor collection procedures and customers who are unable or unwilling to pay for their purchases. Companies with high days sales ratios are unable to convert sales into cash as quickly as firms with lower ratios.
4	The difference in days receivable can be due to models of business in which both these companies operate
	Best buy along with it's online business have it's traditional retail store. However, Amazons sales only
	through internet. It becomes virtually very easy for best buy to push the customer for prompt payments.
	Further, the receivables turnover ratio of of best buy is 31.2 which is fairly very high as compared to
	that of Amazon of 17.2 which shows that Best buy is able to collect cash from customer more promptly.
	It is very important to have efficiency in collecting on the outstanding accounts receivable because
	Obviously, sales don’t matter if cash is never collected. Further, it reduces the operating cycles and
	saves interest cost of the company. Effective collection system reduces the possibility of losses from
	bad debt which is a real headache of the companies nowadays.

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