Please explain: An analyst gathered the following information for a company: Ratios 2005 2004 2003 Inventory turnover 5 6 7 Total asset turnover 6 5 3 Accounts payable turnover 9 9 8 Accounts receivable turnover 11 12 15 All other factors being equal, which of the following is the best conclusion with respect to the information above? From 2003 to 2005, the company’s: Select exactly 1 answer(s) from the following: A. fixed asset turnover increased. B. credit policies became more strict. C. cash conversion cycle became shorter. D. average inventory processing time decreased.
The numerator in the cash ratio includes strictly immediat liquidities, cash and money market securities. The quick ratio (acid test) includs in the numerator Accounts Receivables +Cash+Marketable securities. The current ratio includes in the numerator Inventory + Accounts Receivables +Cash+Marketable securities Same cash ratio => same immediate liquidities Different quick ratio=> they must have different accounts receivables, one has more than the other (company B has more accounts receivable) Same current ratio=> AR1+Inventory1=AR2+Inventory 2, knowing that company 2 has higher AR, it must be that it has lower inventory. Converselly, company A has lower AR, higher inventory. Answer must be A.
you changed your post:)))
map1 Wrote: ------------------------------------------------------- > you changed your post:))) Sorry, there was a copy-paste error that I had corrected. Apologies again.
I think it is C longer time to collect A/R means that credit policy became more LAX
i think the question is about the net operating cycle
Ratios 2005 2004 2003 Inventory turnover 5 6 7 :decreased along the years, could be that more inventory is on the books, or COGS decreased Total asset turnover 6 5 3 : increased, could be that total assets decreased, or Sales increased Accounts payable turnover 9 9 8 : increased, but then remained stable, so payments to suppliers are more or less stable, that means purchases and payments for purchases have been made the same way for the last 2 years Accounts receivable turnover 11 12 15 : decreased along the years, that could be because of increasing AR on the books of this company, or it could be because of lower sales © I just calculated the cash conversion cycle, it increased from about 30 to about 70 and ended out at about 66, there is no indication of constant conversion cycle becoming smaller. Strike this one out. (D) Inventory processing times have been increasing over the last 3 years (from 365/7 to 365/6 to 365/5). Strike this one out, this is not the answer. We’re left with A and B. (B) credit policies become more strict, that’s not affecting your accounts receivables at all. It could however increase your inventory, people cannot afford to buy as much as they did in the past. But you still pay at the same rate you paid last year, so I don’t think this is the answer. I would strike this one out. (A) Total assets turnover increased, yet you have lots of signs that you have higher inventory, higher AR. Must be something with the fixed assets then, that reduced your total assets and increased the total assets turnover. I would reason A.
> (B) credit policies become more strict, that’s not > affecting your accounts receivables at all. It > could however increase your inventory, people > cannot afford to buy as much as they did in the > past. But you still pay at the same rate you paid > last year, so I don’t think this is the answer. I > would strike this one out. > it does! it is a tradeoff.
A/R are obligations of others to you, for goods and services that you delivered. If credit policies become stricter, would you not adopt those stiffer credit policies with regard to your customers? therefore not deliver goods and services on credit to them?