Which of the following trends found on financial reports would most likely indicate a possible problem?
Which of the following trends found on financial reports would most likely indicate a possible problem?
A material decrease in the receivables turnover would most likely indicate a possible problem. This is because receivables turnover measures how efficiently a company collects its receivables. A decrease implies that the company is taking longer to collect money from customers, which could indicate issues with credit policies, customer dissatisfaction, or financial difficulties among customers. These problems can lead to cash flow issues for the company.
Increase in inventory turnover is not a problem since it means high sales, while decrease in AR turnover means poor credit policies or poor collections..
Answer - A ( the number of times debtors is converted into cash has decreased in the period) - so this would mean a decrease in AR or increase in Average AR Answer - B (a number of times inventory is converted to cash/sold in the period) would mean an increase in COS (increase in sales) or decrease in average inventory
Pls can you explain why option A is the right answer and not option B?
A would mean that the average receivables have materially increased.. which would be a problem. i think
Assuming credit sales remain consistent, an increase in average AR (resulting to decrease in AR turnover) can possibly indicate poor customer credit mananagement. For B, assuming COGS is consistent, decrease in average Inventory (increasing Inventory Turnover) can possibly indicate that inventories are consistently moving thus more sales.