What are some pros and cons of holding high levels of current assets in relation to sales? Use the DuPont equation to help explain your answer.
To explain: The pros and cons related to keep high current assets in reference to sales.
Introduction:
DuPont Analysis:
Under DuPont analysis the return on equity can be calculated as a product of profit margin, total assets turnover and equity multiplier.
Current Assets:
Any asset which can be reported in the form of cash within duration of 1 financial year is classified as current assets.
Return on Equity (ROE):
Return on equity represents the amount of return earned by equity shareholders; it can be calculated by dividing earnings available for equity shareholders to total equity capital.
Pros:
The excess availability of current assets will report an increase in the balance of accounts receivable due to relaxed credit policy. This will increase the sales and earnings of the company.
Cons:
The high balance of current assets will result in a lower assets turnover ratio, which will indicate low efficiency of the company in relevance to sales generation.
As per DuPont equation:
Formula to calculate return on equity (ROE),
Hence, the situation related to high level of current assets has advantages and disadvantages.
Subscribe now to access step-by-step solutions to millions of textbook problems written by subject matter experts!
Fundamentals Of Financial Management, Concise Edition (mindtap Course List)
Fundamentals of Financial Management, Concise Edition (MindTap Course List)
STATISTICS F/BUSINESS+ECONOMICS-TEXT
Principles of Economics (MindTap Course List)
Probability and Statistics for Engineering and the Sciences
Essentials of Business Communication (MindTap Course List)
Principles of Microeconomics (MindTap Course List)
ECON: MICRO4 (New, Engaging Titles from 4LTR Press)
Cornerstones of Financial Accounting
Brief Principles of Macroeconomics (MindTap Course List)
Principles of Macroeconomics (MindTap Course List)
Foundations of Business (MindTap Course List)
Accounting Information Systems
Corporate Financial Accounting
Financial & Managerial Accounting
Financial And Managerial Accounting
Management, Loose-Leaf Version
Essentials of Economics (MindTap Course List)
Financial Accounting
College Accounting, Chapters 1-27
Intermediate Accounting: Reporting And Analysis
College Accounting (Book Only): A Career Approach
Managerial Accounting: The Cornerstone of Business Decision-Making
MKTG 12:STUDENT ED.-TEXT
Contemporary Marketing
Accounting Information Systems
Financial Accounting
Financial & Managerial Accounting
Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)
Pkg Acc Infor Systems MS VISIO CD
College Accounting, Chapters 1-27 (New in Accounting from Heintz and Parry)
Principles of Macroeconomics (MindTap Course List)
Accounting (Text Only)
Statistics for Business & Economics, Revised (MindTap Course List)
College Accounting (Book Only): A Career Approach
Exploring Economics
Purchasing and Supply Chain Management
Macroeconomics
Economics (MindTap Course List)
Cornerstones of Cost Management (Cornerstones Series)
Economics For Today
Survey of Accounting (Accounting I)
Corporate Financial Accounting
Practical Management Science
Microeconomics
PAYROLL ACCT.,2019 ED.(LL)-TEXT
Economics: Private and Public Choice (MindTap Course List)
MACROECONOMICS FOR TODAY
Managerial Accounting
Understanding Management (MindTap Course List)
Macroeconomics: Private and Public Choice (MindTap Course List)
Principles of Microeconomics
Micro Economics For Today
Microeconomics: Private and Public Choice (MindTap Course List)