Reference no: EM133205257
Assignment - Essential Values of a Worthy Leader Essay
Description - You are analyzing ABC Company, a computer manufacturer. You notice that inventory turnover this year is significantly lower than prior years. You also notice that accounts receivable turnover is significantly lower this year when compared to previous years. Provide three explanations that would be consistent with your observation for inventory turnover and include an explanation of whether these would be of concern to you, as well as what the effect might be on the next period's financial results. In addition, provide three explanations that would be consistent with your observation of the accounts receivable turnover, and also explain whether these would be of concern to you.
Just do response each posted down below # 1 to 3 only
Posted 1 - Low Inventory Turnover: One reason inventory turnover may be low is due to a decrease in sales. This is probably one of the most common reasons. This may be a concern but it can ultimately depend on the industry at the time as well as any circumstances from the economy, and more. This may affect next period's financial statements by its reflection of a decrease in net sales and cost of goods sold. The second reason for low inventory turnover is holding onto too much inventory (overstocking). This is a concern because a company may be ordering too much when there is not a demand for it. The next period's financial statements may look as if shareholders' equity is overstated due to an excess of inventory in assets. The last reason turnover may be low is because of obsolescence. This is a concern because companies may have a product that is out of date and essentially worthless. This can affect financial statements in the next period because it may seem that the company has inventory that can be converted to cash (liquidity) when in reality they don't. All they have is worthless inventory.
Low Accounts Receivable Turnover: Reasons for low accounts receivable turnover can result from a company having a poor collection process, bad credit policies, or customers that are not financially viable or creditworthy (Receivables Turnover Ratio, 2019). This is a big concern because if a company is able to sell a product but cannot collect money from the customers who bought it, reflects not only issues regarding the customers who aren't paying but also the policies and collection strategies of the company with the low A/R turnover ratio. This may reflect negatively in future financial statements because the company will have a high number in A/R as well as a high number in the allowance for doubtful accounts.
Posted 2 - The decrease in inventory turnover can be the result of overstocking their product, decrease in sales, or a sudden change in the supply and demand of the product. All of these should be of a concern to the company. Overstocking can be from the inability to properly manage and oversee the need of raw materials and products for production leaving money lost in materials sitting. A decrease in sales can be from multiple issues but all will lead to concern for the company. The loss of demand for your product can lead to the products you already produced go under a loss as you can not move the product. The decrease in accounts receivable turnover is due to increase in bad debts, downturn in the economy, and inept in collecting the debts. These should be a concern as if you are unable to receive the payments owed your cash flow will be comprised. These results in the inability to pay of your debtors. A decrease in the sales and enlivenment of payments both have a negative impact on the company. Also, not being able to properly assess the company debt and taking on bad debt brings forth lasting cash flow issues.
Posted 3 - Hello professor and everyone,
Three explanations for a lower turnover rate are:
1. Change in method used for valuation of inventory. Changing from FIFO method to LIFO will result in a lower inventory turnover rate. Wondering the reason for this decision. Companies prefer a higher turnover rate. Knowing this would lower it, why make this change? Was it done to affect the income statement?
2. Decrease in sales. By investigate the sales force as opposed to previous periods. This could be from the loss of human capital.
3. Increase in inventory levels. Looking at the reason why the inventory increases due to expansion, unable to move inventories or extra buy, etc. This would increase assets in the balance sheet. Possibly concerning.
Three explanations for a lower accounts receivable turnover:
1. Decrease in debtor's cash collections.
2. Increase in bad debts. By investigating the process and company's policy in place with extending customer credit. It could be that the company has started to open more accounts to higher risk clients. It could also be an issue with human capital and not having the manpower" to collect on accounts.
3. Decrease in sales. This run hand in hand with the lower turnover rate. Sales effectiveness has decrease or losing market with current products.
Overall, I would concentrate on better sales. Increase or change marketing strategy and the quality of the sales force.