Question

analysts maintain that two of the most important ratios are inventory turnover and accounts receivable turnover.

You are analyzing ABC Company, a computer manufacturer. You notice that inventory turnover this year is significantly lower than in 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

Answer 1

Inventory turnover ratio is the movement of inventory to sales , that how often the company is able to sell the goods it produces.

Three reasons why the inventory turnover may have decreased:

1. There is decline in the goods sold versus the goods produced.

2. It indicates that the inventory is slow moving and may not keep with the market demand.

3. There is no control over the inventory and the company does not eliminate obsolete items.

Accounts receiavble turnover ratio indicates how often the company is able to collect the cash from its accounts receivable.

Three reasons:

1. There are higher delinquent clients.

2. The company is not efficiently following up for collection of debts and shows poor debtor management system.

3. Reflects dissatisfied clients with either the companys products or services.