Alcatel Receivables - Case Study Example

ALCATEL CASE STUDY Number Department Grade 5th March, Question F: Average Collection Period According to Alcatel’s balance sheet, the trade receivables of the company for the years 2000, 2001 and 2002 were 15,819 million Euros, 14,956 million Euros and 8,753 million Euros respectively. This clearly shows that there was a plunge in accounts receivables of 863 million Euros in the year 2001 and a sharp descend of 6203 million Euros in the year 2002. Assuming that all sales are made on credit, 2000’s sales were 31,408 million Euros, 2001’s sales were 25,353 million Euros, and 2002’s sales were 16,547.

The accounts receivable turnover ratio for 2000 was 1.9855, for 2001 was 1.6952 and for the year 2002 was 1.1064. This can be established by dividing each year’s credit sales by its account receivables, in this case 31408 divided by15,819 for the year 2000, 25,353 divided by14,956 for the year 2001 and 16,547 divided by8,753 for the year 2002. The average collection period for year 2002 can be established by dividing 365 by year’s accounts receivable turnover rate to get 330 days. The collection period for the year 2001 was 215 days.

This is contrary to Alcatel’s CFO who pointed out that that the average collection period for accounts receivable in the year 2001 was 117 days and that of the year 2002 was 104 days. According to the wall street journal of February 5th 2003, the decrease in accounts receivables was as a result of the company’s decision of reduce inventories and compelling their customers to meet their bills faster in the fourth quarter. The decision has also negatively affected the sales of the company since there is an observable decline in sales through the years 2000 to 2002.

This action resulted in generation of 704 million Euros during the fourth quarter in operating cash flow in the year 2002. The high earnings were not only affected by the two decisions made by the company but also the issue of convertible bonds in December of that financial year. Question G: Quarterly Average Collection Period The standard compilation period for the fourth quarter of 2002 can be established by dividing 4,508 by 2188.25 (which is a quarter of 8,753) to get an accounts receivable turnover ratio of 2.0601. Therefore, the average collection period of that quarter was 44 days since the quarter had 91.25 days. The standard compilation period for the fourth quarter of 2001 can be established by dividing 6,766 by 3739 (which is a quarter of 14,956) to get an accounts receivable turnover ratio of 1.8096. Therefore, the average collection period of that quarter was 50 days since the quarter had 91.25 days. It is observable that there is a down trend in the average collection period on a quarterly basis and this may have resulted in the yearly decline of the accounts receivables of the company.

Question H: Factoring Receivables Factoring is a financial operation whereby a business vends its trade receivables to a third party (known as a factor) at a discount (Chandra 45). Factoring receivables ensures that a company maximizes its cash flow in the event of a credit sale by eliminating the need for cash sales, hence attractive terms of sale and business cycles of waiting for payments. In order for a company to get attractive rates from a factor, the creditworthiness of a debtor should be considered.

Most companies which are involved in a credit sale find factoring as of great significance since it not only ensures immediate cash without incurring new debt but, the company has expanded growth capability through an increase in its production and sales. Factoring guarantees relief from the accountability of collecting slow pay or bad debt. Question I: Securitization of Receivables Effects of Securitization on Average Collection Period Securitization of receivables is whereby a company pools together different of types of debts then sell the consolidated debt as bonds, securities or collateral to investors (Chandra 48).

The investors are paid back by the interests on the debt on a regular basis. Securitization of receivables therefore ensures that the company involved has finances to cover for its expenses. It transferred debt also guarantees continuous production before the customers pay their debts. Availability of finances to cater for expenses will enable the company to further increase its credit sell which may lead to an increase in the average collection period. On the other hand, the management of a company may compel its debtors to pay their debts since the investors in the company’s security need to be paid interest.

This may result in reduction of the average collection period. Alcatel’s Average Collection Period if it had not Securitized its Receivables If Alcatel had not securitized its receivables for the year 2002 and 2001, the average collection period for the two years could have been expected to be higher compared to the current average collection period. The accounts receivable could have been high which could have resulted to a low accounts receivable turnover ratio. The accounts receivable for 2001 and 2002 was 14,956 million and 8,753 million Euros.

This figure could have been less by 408.312 million Euros in 2002 and 786.1 million Euros in 2001. This would have resulted to an accounts receivable of 8344.688 million Euros in 2002 and 14169.9 Euros in the year 2001. The estimates for the average collection period for year 2002 could have been 184 days and that of the year 2001 could have been 204 days. Question J: Effects of Securitization on Balance sheet in U.S GAAP In the United States of America, the General Accepted Accounting Principles provide that securitization of receivable should be classified as secured borrowing and therefore taken to be a debt or a liability to the company.

All liabilities should be deducted from current assets. Accounts receivables could still be treated as non current assets but factorizing the receivables would mean taking a loan since the accounts receivables are taken to be like collateral for the loan. Works cited Chandra Prasanna. Financial Management: Theory and Practice. New Delhi: McGraw Hill Publishing Ltd, 2008. Print.