Financial Reporting Financial Statement Analysis and Valuati

Financial Reporting, Financial Statement Analysis, and Valuation: A STRATEGIC PERSPECTIVE 9e

LO 4-4 4.16 Calculating and Interpreting Accounts Receivable Turnover Ratios. Microsoft Corporation (Microsoft) and Oracle Corporation (Oracle) engage in the design, manufacture, and sale of computer software. Microsoft sells and licenses a wide range of systems and application software to businesses, computer hardware manufacturers, and consumer retailers. Oracle sells software for information management almost exclusively to businesses. Exhibit 4.23 presents selected data for the two firms for three recent years. Exhibit 4.23 Selected Data for Microsoft and Oracle amounts in millions) (Problem 4.16) Year 3 Year 2 Year 1 Microsoft Sales Average accounts receivable Change in sales from previous year Oracle Sales Average accounts receivable Change in sales from previous year $58,437 12,391 S60,420 $51,122 12,464 +1 8.2% 10,327 +1 5.5% (3.3)% $23,252 $22,430 $17,996 4430 +3.7% 5,799 +24.6% 4,589 +25.2% REQUIRED a. Calculate the accounts receivable turnover ratio for Microsoft and Oracle for Year 1, Year b. Suggest possible reasons for the differences in the accounts receivable turnovers of c. Suggest possible reasons for the trends in the accounts receivable turnover for the two 2, and Year 3 Microsoft and Oracle during the three-year period firms over the three-year period.

Solution

Answer a. Accounts Receivable Turnover Ratio = Sales / Average Accounts Receivable Year 3 Year 2 Year 1 Microsoft Sales    58,437.00    60,420.00    51,122.00 Avg. Accounts Receivable    12,391.00    12,464.00    10,327.00 Accounts Receiavable Turnover Ratio (In Times)              4.72              4.85              4.95 Oracle Sales    23,252.00    22,430.00    17,996.00 Avg. Accounts Receivable      4,430.00      5,799.00      4,589.00 Accounts Receiavable Turnover Ratio (In Times)              5.25              3.87              3.92 Answer b. In Year 1 & 2, Accounts Receiavble Turnover of Microsoft is higher than Oracle. But in Year 3, Accounts Receivable Turnover of Oracle is more than Microsoft. Maybe the the reason is sales of Orcale is increased by 3.70%, but sale of Microsoft is decreased by -3.3%. Answer c. Accounts Receiavble turnover measures a business ability to collect its receiavbles, which means higher the ratio better it is. In Microsoft, the Accounts Receivable is decreasing year by year, which means he company is giving more geneorous in giving credit time to their customers to increase their sales. In Oracle, the accounts receivable turnover is increasing year by year, this means they are more efficiently managing their accounts receivable and lowering the credit time given to their debtors.