Financial Accounting

PROBLEM 7-3

ACCOUNTS RECEIVABLE TURNOVER FOR COCA-COLA AND PEPSICO

1. Accounts receivable turnover ratios:

Coca-Cola:

= $24,088 / [($2,587 + $2,281)/2]

= $24,088/$2,434

= 9.90 times

PepsiCo:

= $35,137 / [($3,725 + $3,261)/2]

= $35,137/$3,493

= 10.06 times

2. Average collection period:

Coca-Cola:

360/9.90 = 36.36 days

PepsiCo:

360/10.06 = 35.78 days

Both companies have an average collection period of about 36 days. A collection period that averages just over one month appears to be reasonable.

3. The turnover ratios and the average collection periods are very similar for the two companies. It would be especially helpful to measure these statistics, accounts receivable turnover ratio and average collection period, with the same measures for prior years. It would also be helpful to compare these measures with the industry averages.

PROBLEM 7-7

EFFECTS OF CHANGES IN RECEIVABLE BALANCES ON STATEMENT OF CASH FLOWS

1. Statement of cash flows:

STEGNER INC.

STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED DECEMBER 31, 2008

Net income $ 130,000

Adjustments to reconcile net income to net cash

used by operating activities:

Increase in accounts receivable $(140,000)*

Decrease in notes receivable 5,000** (135,000)

Cash flows from operating activities $ (5,000)

Cash, December 31, 2007 110,000

Cash, December 31, 2008 $ 105,000

*$223,000 – $83,000

**$100,000 – $95,000

2. Memorandum to the president:

TO:

FROM:

DATE:

SUBJECT: Cash Flows

You recently expressed concern about the decrease in the company’s cash balance in spite of the profitable year that was reported on this year’s income statement. My thoughts and a copy of the company’s 2008 statement of cash flows follow.

Although net income on an accrual basis was $130,000, the company’s cash balance declined by $5,000 during the year for two reasons. Most importantly, accounts receivable increased by...