AFM 101 Classroom Solutions - Nov 28th - difficulties In any case the company should do an analysis of its trade receivables on a regular basis and

E13–8 Turnover : Trade receivables ($500,000 x 50%) ÷ [($50,000 + $60,000) ÷ 2] = 4.5 Inventory ($500,000 x .6) ÷ [($50,000 + $30,000) ÷ 2] = 7.5 Average age of receivables = 365 days ÷ 4.5 = 81 days Average days’ supply of inventory = 365 days ÷ 7.5 = 48.7 days The average age of receivables is relatively long if we consider a typical credit period of 30 days. It is possible that the company is not enforcing a strict collection policy from customers in order to keep a good relationship with them, especially if they are major customers. The relatively high average collection period could have resulted from a more liberal credit policy that resulted in an increase in sales and in outstanding trade receivables. On the other hand, this average collection period may reflect delays in collecting from customers that are facing financial

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Unformatted text preview: difficulties. In any case, the company should do an analysis of its trade receivables on a regular basis and monitor collection efforts from potentially delinquent accounts. The average days’ supply of inventory depends on the nature of the goods sold by the company and the reliability of its suppliers. To evaluate the measure properly, one must compare it to previous levels as well as to the industry average. E13-11 Transaction Debt-to-equity ratio Times Interest Earned ratio Cash Coverage ratio a. Decrease No change No change b. Increase No change No change c. Decrease No change No change d. Increase Decrease No change e. No change No change No change...
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