Accounting Case Study: Audit of Computers Inc

732 Words Jan 13th, 2018 3 Pages
It focuses on year-end receivables and inventory levels of Computers, Inc. Kim lets Tom know that the ratio analysis on inventory has decreased from 5 to 2, and the turnover decreased from 12 to 7. Tom explains both away by indicating that: 1) the ratio on inventory will be handled by having a fire-sale of leftover computers after the first of the year, and 2) the accounts receivable issue is the result of lowering standards for commercial customers to expand sales.
Part 1 Kim is concerned with Tom's responses to the ratios because the numbers simply do not match the appropriate direction for the company. Accounts receivable turnover means the number of times per year that the entire accounts receivable are paid completely; in this case instead of monthly, down to 7 times per year. This means that for 5 months of a fiscal year, Computers Inc. is "holding" more debt that income. Similarly, the inventory ratio shows the number of times per year that the inventory completely turns, in this case from once every 2.4 months, or about every 9 weeks, to once every 6 months. Sales may be up, but the company's ability to turn product is not. Ratio analysis is used in tandem with other data to show the health of the company. Kim likely believes that the inventory ratio shows that stock is not being converted into sales and low profit. Similarly, Kim is concerned that credit terms are too lax,…

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