Accounting Homework Help

Hey. So I'm doing Ratios for Home Depot and Lowe's companies

The thing is Home Depot has a Receivable Turnover while Lowe's company does not (seems because they defer it's receivables collections to another company)

now in my mind that seems that Home Depot is better suited to overlook it's receivables and it's better than lowe's which does not have that.

is there anything else I need to say to justify that home depot is a better company in terms of receivable turnover?

I need more information but just because they are outsourcing it doesnt mean its bad. What class and whats the q? Phone Post 3.0

Are you talking Inventory turns? Or the way the company receives prodroduct?

Lowes does measure inventory turns Phone Post 3.0

Class is Intermediate Accounting 1

the question from the professor herself:

"You are correct that Lowe's does not report receivables, but if you look in the notes to the financials, you will see why this is the case. Therefore, in lieu of doing the receivables turnover ratio for Lowes, please list the reason why they do not report receivables on their financials and explain whether you think this reason means that they are doing a better/worse/no difference job in managing their receivables than Home Depot."

Instead of a receivables account maybe they have a cost of goods sold and sales revenue account? Phone Post 3.0

Lowes keeps more merchandise on hand to have it available for the customers. Take major appliances for instants 85% of them you can carry out the door with you the day of purchase you cannot do that at Home Depot. Phone Post 3.0

Also to truly answer that question you need to delve into their distribution center networks between the two companies. Lowe's carries a large variety of special order product in their distribution centers which means it can arrive at the store within three days whereas ordering from the manufacturer would take 7 to 10 days Phone Post 3.0

Yes but pardon me if i'm wrong

receivables is from the accounts receivables, which is what the company sells for credit and are supposed to "receive" back from customers.

it has nothing to do with the inventory or distribution centers or when it gets there

"Accounts receivable are a legally enforceable claim for payment to a business by its customer/ clients for goods supplied and/or services rendered in execution of the customer’s order."

Lowes is doing what is called factoring. That is when a company sells it's receivables to somebody else at a discount who then owns them and collects them themselves. The goal is to obviously collect the receivables at 100% and therefore make money.

I would assume that the answer would be that Home Depot is the better company as they have the ability and desire to collect their own receivables at 100% and this maximize their profits. That is assuming that the turnover is good.

The benefit to lowes is they are collecting a guaranteed sum up front and passing off the risk. It can be argued that if Home Depot is collecting super slow and has a lot of bad debt (written off receivables you will never get) that lowes is better off, depending on how much they get in their factoring agreement. Home Depot assumes the risk.

Most companies collect their own receivables.

Source: I am a in corporate finance with a major bank. Phone Post 3.0

I'm a CPA, CA, MBA and this is kind of a silly question...

The reason they do not report receivables is stated right in the notes to the FS as you pointed out (factoring their AR)

In isolation, that doesnt really tell you if they're doing a better/worse job of managing their receivables than Home Depot. They may be doing it for a variety of reasons (hedge, cash flow, etc..) or they could could have a lot of at-risk accounts.

Since we're credential dropping here (apparently), I too am an MBA, and am a member if Mensa. Phone Post 3.0

I knew we had some experts.

Thank you, it was what I figured but didn't know what it was called, or what was the benefit

I appreciate it.

darkmerlin - I knew we had some experts.

Thank you, it was what I figured but didn't know what it was called, or what was the benefit

I appreciate it.
No problem.

If you want brownie points, and the notes don't detail the factoring agreement, you could rough it out by calculating what percent of receivables Home depot's bad debts are to get an idea of what percent they actually collect.

If you see that they collect on like 95% of their receivables then you would know that lowes would have to get at least 96 cents on the dollar in their factoring deals (which is about 0% likely) to be ultimately better off. Phone Post 3.0

Mctowlie and T Bag have pretty much nailed it. I'd only add that IMHO a Co will only factor receivables out of weakness.

Its not definitive but factoring would raise the due diligence threshold for me when evaluating a Co.

As far as credentials and pedigree I feel my join date speaks for itself and I've been hit in the head alot

You prof is asking a question with insufficient facts to provide a perfect answer. Just like real life

Good luck