Chapter 13: 8DQ (page 614)
What does a relatively high accounts receivable turnover indicate about a company’s short-term liquidity?
A high account receivable turnover ratio shows that the company's collection process is quick and good. But it also indicates that credit terms are not favorable for creditors.
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Question: Which items are usually assigned a 100% value on (a) a common-size balance sheet and (b) a common-size income statement?
For each ratio listed, identify whether the change in ratio value from 2016 to 2017 is usually regarded as favorable or unfavorable.
Ratio | 2017 | 2016 | Ratio | 2017 | 2016 | ||
1 | Profit margin | 9% | 8% | 5 | Accounts receivable turnover | 5.5 | 6.7 |
2 | Debt ratio | 47% | 42% | 6 | Basic earnings per share | \(1.25 | \)1.10 |
3 | Gross margin | 34% | 46% | 7 | Inventory turnover | 3.6 | 3.4 |
4 | Acid test ratio | 1.00 | 1.15 | 8 | Dividend yield | 2.0% | 1.2% |
Identify which of the following six metrics a through f best completes questions 1 through 3 below.
a. Days’ sales uncollectedd. Return on total assets
b. Accounts receivable turnover e. Total asset turnover
c. Working capitalf. Profit margin
1. Which two ratios are key components in measuring a company’s operating efficiency? Which ratio summarizes these two components?
2. What measure reflects the difference between current assets and current liabilities?
3. Which two short-term liquidity ratios measure how frequently a company collects its accounts?
Where on the income statement does a company report an unusual gain not expected to occur more often than once every two years or so?
Assume that Carla Harris of Morgan Stanley (MorganStanley.com) has impressed you with the company’s success and its commitment to ethical behavior. You learn of a staff opening at Morgan Stanley and decide to apply for it. Your resume is successfully screened from the thousands received and you advance to the interview process. You learn that the interview consists of analyzing the following financial facts and answering analysis questions below. (The data are taken from a small merchandiser in outdoor recreational equipment.)
2017 | 2016 | 2015 | |
Sales trend percents | 137.0% | 125.0% | 100.0% |
Selling expenses to sales | 9.8% | 13.7% | 15.3% |
Sales to plant assets ratio | 3.5 to 1 | 3.3 to 1 | 3.0 to 1 |
Current ratio | 2.6 to 1 | 2.4 to 1 | 2.1 to 1 |
Acid test ratio | 0.8 to 1 | 1.1 to 1 | 1.2 to 1 |
Merchandise inventory turnover | 7.5 times | 8.7 times | 9.9 times |
Accounts receivable turnover | 6.7 times | 7.4 times | 8.2 times |
Total asset turnover | 2.6 times | 2.6 times | 3.0 times |
Return on total assets | 8.8% | 9.4% | 11.1% |
Return on equity | 9.75% | 11.50% | 12.25% |
Profit margin ratio | 3.3% | 3.5% | 3.7% |
Required
Use these data to answer each of the following questions with explanations.
1. Is it becoming easier for the company to meet its current liabilities on time and to take advantage of any available cash discounts? Explain.
2. Is the company collecting its accounts receivable more rapidly? Explain.
3. Is the company’s investment in accounts receivable decreasing? Explain.
4. Is the company’s investment in plant assets increasing? Explain.
5. Is the owner’s investment becoming more profitable? Explain.
6. Did the dollar amount of selling expenses decrease during the three-year period? Explain.
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