Chapter 14 Financial Statement Analysis 643
The number of days’ sales in receivables is computed for Pixar and DreamWorks as
follows:
The number of days’ sales in receivables is an estimate of the length of time (in days) the
accounts receivable have been outstanding. As can be seen, the number of days’ sales
outstanding in accounts receivable is very high for both companies. Why is this? The
bulk of the accounts receivable for both companies is from film distribution companies,
such as DisneyorUniversal. These companies distribute and market films to theaters
and collect money from theaters. Payments are then made by the distribution companies
to production companies, such as Pixar and DreamWorks. The distribution companies
are apparently slow in making contractual payments to the production companies for
the released films. For many firms, the number of day’s sales in receivables should
closely match their collection terms with their customers, which are often less than 60
days. For example, the number of days’ sales in receivables for Procter & Gamble
Companyis 28.45 days.
Inventory Analysis
A business should keep enough inventory on hand to meet the needs of its customers
and its operations. At the same time, however, an excessive amount of inventory re-
duces liquidity by tying up funds. Excess inventories also increase insurance expense,
property taxes, storage costs, and other related expenses. These expenses further reduce
funds that could be used elsewhere to improve operations. Finally, excess inventory
also increases the risk of losses because of price declines or obsolescence of the inven-
tory. Two measures that are useful for evaluating inventory efficiency are the inventory
turnover and the number of days’ sales in inventory.
Inventory Turnover. The relationship between the volume of goods (merchandise)
sold and inventory may be stated as the inventory turnover. It is computed by divid-
ing the cost of goods sold by the average inventory. If monthly data are not available,
the average of the inventory at the beginning and the end of the year may be used. The
inventory turnover for Pixar and DreamWorks is computed as follows:
Pixar DreamWorks
(in millions, (in millions,
except ratio) except ratio)Accounts receivable (net):
Beginning of year $204.90 $ 132.30
End of year 82.00 386.10
Total $286.90 $ 518.40
a. Average (Total ÷ 2) $143.45 $ 259.20
Net sales $273.50 $1,078.20
b. Average daily sales (Net sales ÷ 365) $ 0.75 $ 2.95
Number of days’ sales in receivables (a ÷ b) 191.3 87.9
Pixar DreamWorks
(in millions, (in millions,
except ratio) except ratio)a. Cost of goods sold $ 29.90 $566.20
Inventory:
Beginning of year $107.70 $427.50
End of year 140.00 519.90
Total $247.70 $947.40
b. Average (Total ÷ 2) $123.85 $473.70
Inventory turnover (a ÷ b) 0.24 1.2