UCF ACG3137 - Chapter 11 (reviewing exam 4)

turnover

= sales/ average assets

Find accounts receivable turnover: accoutnts receivable turnover for 2014 sales for 2014........$8,268 AR at 8/3/14............ 640 AR at 7/28/13.......... 635

ART = sales / Average accounts receivable = $8,268 / {($635 + $670) /2} =12.7 times

number of days' sales in inventory

An alternative measure of how well inventory is being managed; computed by dividing 365 days by the inventory turnover ratio.

Number of days' sales in accounts receivable

An indicator of the efficiency with which accounts receivable are collected.

Why are average assets used in the turnover calculation (rather than year-end assets)?

Because the amount invested is compared to sales, which are generated over a period of time.

what are the financial statement analysis ratios?

Liquidity, Activity, Profitability, and debt or financial leverage

A company using LIFO and an accelerated depreciation method would report what?

Lower amounts for inventory and net book value of depreciable assets

Find Plant and equipment turnover: Plant and equipment turnover for 2014 sales for 2014 ..................$8,268 P&E (net) at 8/3/14...........2,318 P&E (net) AT 7/28/13.........2,260

P&E turnover= sales / average plant and equipment = $8,268 / {(2,260 + 2,318) /2} =3.6 times

DuPont Model

ROI= margin x turnover

Many firms disclose what when using the LIFO method to ease the reporting difficulty?

They use a LIFO reserve amount in the notes to the financial statement

When in a period of rising prices, a firm using the FIFO cost flow assumption will report what compared to a LIFO cost flow assumption?

They will report a relatively higher asset value for inventories than a firm using LIFO (even if the firms are similar in other respects, they will report different amounts of working capital, and they will have different current ratios)

[T/F] a direct comparison of the liquidity of the two firms by using these measures is not possible

True

[T/F] when calculating inventory turnover, most analysts substitute the cost of goods sold amount for the sales amount in the calculation because inventories are reported at cost, not seeing prices. WHY?

True, because this approach eliminates distortions that could be caused by sales mix changes between product categories with different gross profit ratios or markup percentages.

what does it mean to use the trend of financial statement ratios to compare the financial position and results of operations of one firm with another firm?

it means that comparing the results of a particular ratio over a period of time permits a more valid comparison of the direction of relative performance than a comparison of the ratio at a single point in time. (it is necessary to understand how alternative accounting practices have affected the financial statement amounts reported for each firm)

what does it mean to state that the total asset turnover has improved?

it means that the ratio of sales for the period to average total assets are being used during the period has risen, indicating that assets were used more efficiently relative to sales generated.

what does it mean to assess the activity measures of an entity?

it means that to determine how efficiently the firm's assets are being used and/or managed, various turnover ratios are calculated and evaluated

What does it mean to assess the liquidity of an entity?

it means that working capital, the current ratio and the acid-test ratio are calculated and interpreted to determine whether the entity is likely to be able to pay its current obligations when they come due.

it is difficult to develop reliable rules of thumb for the evolution of ratio results because firms within a given industry may vary considerably over time in terms of their:

market segmentation strategies and selected accounting methods

operating income if frequently substituted for net income in the calculation of ROI and ROE because:

operating income excludes the effects of discontinued operations and, thus provides a more forward looking measure of the firm's profitability AND operating income excludes income tax expenses, which varies from firm to firm based on country-specific tax rates

what are the two most significant measures of profitability?

return on equity and return on investment

Alternative inventory cost flow assumption and depreciation methods will affect what?

the comparability of turnover between companies

LIFO reserve is

the difference between the inventory valuation as reported under the LIFO basis and the amount that would have been reported under the FIFO basis.

what happens when the lower that inventories can be maintained relative sales?

the less inventory needs to be financed with debt or stockholders' equity, and the greater the return on investment

activity measures focus primarily on what?

the relationship between asset levels and sales (i.e., turnover)

the inventory cost flow assumption will influence what?

the result of the inventory activity calculations

what is the primary objective of a JIT (just-in-time) system?

to keep the investment in inventories at a minimum by forecasting needs and having suppliers deliver components as they are needed in the production process.

Number of days' sales in inventory for 2014: COGS for 2014..................$5,370 inventories at 8/3/14...........1,016

Average day's COGS = annual COGS / 365 = $5,270 / 365 = $14.712 Days' sales in inventory = inventory at year-end / avg day's COGS = $1,016 / $14,712 = 69.1 days

Number of days' sales in accounts receivable for 2014: Sales for 2014.........$8,268 AR at 8/3/14................670

Average day's sales = annual sales / 365 = 8,268 /365 = $22.652 Days' sales in AR = AR at year-end / average day's sales = 670 / 22.652 = 29.6 days

Find the inventory turnover: Inventory turnover for 2014 COGS for 2014.................$5,370 Inventories at 8/3/14..........1,016 inventories at 7,28,13............925

Inventory turnover = COGS / Average inventories =$5,370 / {(925 + 1,015) /2) =5.6 times

What is the effect of the inventory cost flow assumption on working capital?

When the cost of items being purchases for inventory is changing, the inventory cost flow assumption used (e.g., FIFO and LIFO) influences the inventory account balance, total current assets, and working capital.

if a company is reporting lover asset values, would they show a higher or lower asset turnover?

high turnover

Liquidity measures

Working Capital, current ratio and acid-test ratio. ALSO How quickly an item can be converted into cash

turnover is frequently calculated for the following:

accounts receivable inventories plant and equipment total operating assets total assets

what is the risk of having minimum inventories?

an unanticipated increase in demand or a delay in receiving raw materials or finished product can resulting an out-of-stock situation and may result in lost sales.

why are year-end asset values used instead of average amounts?

because the focus is on the number of days' sales (or cost of sales) in the ending balance sheet amounts

how are the average assets amount determined?

by using the balance sheet amounts reported at the beginning and end of the period

net book value

cost - accumulated depreciation

the higher the turnover or the fewer the number of days' sales in accounts receivable and inventory, the greater the what?

efficiency