Receivables and inventory turnover Thornhy Inc. completed its fiscal year on December 31- The auditor, Kim Holmes, has approached the CFO. Brad Potter, regarding the year-end receivables and inventory levels of Thornby Inc. The following conversation lakes place: Kim: We are beginning our audit of Thornby Inc. and have prepared ratio analyses to determine if there have been significant changes in operations or financial position. This helps us guide the audit process. This analysis indicates that the inventory turnover has decreased from 5-1 to 3.8, while the accounts receivable turnover has decreased from 12.5 to 9. I was wondering if you could explain this change in operations. Brad: There is little need for concern. The inventor)- represents computers llial we were unable to sell during the holiday buying season. We are confident, however, that we will be able to sell these computers as we move into the next fiscal year. Kim: What gives you this confidence? Brad: We will increase our advertising and provide some very attractive price concessions to move these machines. We have no choice. Newer technology is already out there, and we have to unload this inventory. Kim: ... and the receivables? Brad: As you may be aware, the company is under tremendous pressure to expand sales and profits. As a result, we lowered our credit standards to our commercial customers so that we would be able to sell products to a broader customer base. As a result of this policy change, we have been able to expand sales by 28%. Kim: Your responses have not been reassuring to me. Brad: I'm a little confused. Assets are good, right? Why don't you look at our current ratio? It has improved, hasn't it? I would think that you would view that very favorably. Why is Kim concerned about the inventory and accounts receivable turnover ratios and Brad's responses to them? What action may Kim need to take? How would you respond to Brad's last comment?

BuyFind

Survey of Accounting (Accounting I)

8th Edition
Carl Warren
Publisher: Cengage Learning
ISBN: 9781305961883
BuyFind

Survey of Accounting (Accounting I)

8th Edition
Carl Warren
Publisher: Cengage Learning
ISBN: 9781305961883

Solutions

Chapter
Section
Chapter 9, Problem 9.2C
Textbook Problem

Receivables and inventory turnover
Thornhy Inc. completed its fiscal year on December 31- The auditor, Kim Holmes, has approached the CFO. Brad Potter, regarding the year-end receivables and inventory levels of Thornby Inc. The following conversation lakes place:

Kim: We are beginning our audit of Thornby Inc. and have prepared ratio analyses to determine if there have been significant changes in operations or financial position. This helps us guide the audit process. This analysis indicates that the inventory turnover has decreased from 5-1 to 3.8, while the accounts receivable turnover has decreased from 12.5 to 9. I was wondering if you could explain this change in operations.
Brad: There is little need for concern. The inventor)- represents computers llial we were unable to sell during the holiday buying season. We are confident, however, that we will be able to sell these computers as we move into the next fiscal year.
Kim: What gives you this confidence?
Brad: We will increase our advertising and provide some very attractive price concessions to move these machines. We have no choice. Newer technology is already out there, and we have to unload this inventory. Kim: ... and the receivables?
Brad: As you may be aware, the company is under tremendous pressure to expand sales and profits. As a result, we lowered our credit standards to our commercial customers so that we would be able to sell products to a broader customer base. As a result of this policy change, we have been able to expand sales by 28%. Kim: Your responses have not been reassuring to me.
Brad: I'm a little confused. Assets are good, right? Why don't you look at our current ratio? It has improved, hasn't it? I would think that you would view that very favorably.
Why is Kim concerned about the inventory and accounts receivable turnover ratios and Brad's responses to them? What action may Kim need to take? How would you respond to Brad's last comment?

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Chapter 9 Solutions

Survey of Accounting (Accounting I)
Ch. 9 - For Belzcr Corporation, the working capital at the...Ch. 9 - Why would the accounts receivable turnover ratio...Ch. 9 - A company that grants terms of n/30 on all sales...Ch. 9 - a. Why is it advantageous to have a high inventory...Ch. 9 - What do the following data taken from a...Ch. 9 - a. How does the return on total assets differ from...Ch. 9 - a. Why LS the return on stockholders’ equity by a...Ch. 9 - The net income (after income tax) of Fleming Inc....Ch. 9 - The price-earnings ratio for the common stock of...Ch. 9 - Why would the dividend yield differ significantly...Ch. 9 - Favorable business conditions may bring about...Ch. 9 - Describe two reports provided by independent...Ch. 9 - Vertical analysis of income statement Revenue and...Ch. 9 - Vertical analysis of income statement The...Ch. 9 - Common-sized income statement Revenue and expense...Ch. 9 - Vertical analysis of balance sheet Balance sheet...Ch. 9 - Horizontal analysis of the income statement Income...Ch. 9 - Current position analysis The following data were...Ch. 9 - Current position analysis PepsiCo. Inc. (PEP), the...Ch. 9 - Current position analysis The bond indenture for...Ch. 9 - Accounts receivable analysis The following data...Ch. 9 - Accounts receivable analysis Bassett Stores...Ch. 9 - Inventory analysis The following data were...Ch. 9 - Inventory analysis Costco Wholesale Corporation...Ch. 9 - Ratio of liabilities to stockholders' equity and...Ch. 9 - Debt ratio, ratio of liabilities to stockholders'...Ch. 9 - Debt ratio, ratio of liabilities to stockholders'...Ch. 9 - Asset Turnover Three major transportation segments...Ch. 9 - Profitability metrics The following selected data...Ch. 9 - Profitability metrics Macy's, Inc. (M). sells...Ch. 9 - Seven metrics The following data were taken from...Ch. 9 - Six metrics The balance sheet for Shryer...Ch. 9 - Earnings per share, price-earnings ratio, dividend...Ch. 9 - Price-earnings ratio, dividend yield The table...Ch. 9 - Unusual income statement items Assume that the...Ch. 9 - Horizontal analysis for income statement For 20Y3....Ch. 9 - Horizontal analysis for income statement For 20Y3....Ch. 9 - Vertical analysis for income statement For 20Y6,...Ch. 9 - Vertical analysis for income statement For 20Y6,...Ch. 9 - Effect of transactions on current position...Ch. 9 - Effect of transactions on current position...Ch. 9 - Twenty metrics of liquidity, solvency, and...Ch. 9 - Twenty metrics of liquidity, solvency, and...Ch. 9 - Twenty metrics of liquidity, solvency, and...Ch. 9 - Twenty metrics of liquidity, solvency, and...Ch. 9 - Twenty metrics of liquidity, solvency, and...Ch. 9 - Twenty metrics of liquidity, solvency, and...Ch. 9 - Twenty metrics of liquidity, solvency, and...Ch. 9 - Twenty metrics of liquidity, solvency, and...Ch. 9 - Twenty metrics of liquidity, solvency, and...Ch. 9 - Twenty metrics of liquidity, solvency, and...Ch. 9 - Twenty metrics of liquidity, solvency, and...Ch. 9 - Twenty metrics of liquidity, solvency, and...Ch. 9 - Twenty metrics of liquidity, solvency, and...Ch. 9 - Twenty metrics of liquidity, solvency, and...Ch. 9 - Twenty metrics of liquidity, solvency, and...Ch. 9 - Twenty metrics of liquidity, solvency, and...Ch. 9 - Twenty metrics of liquidity, solvency, and...Ch. 9 - Twenty metrics of liquidity, solvency, and...Ch. 9 - Twenty metrics of liquidity, solvency, and...Ch. 9 - Twenty metrics of liquidity, solvency, and...Ch. 9 - Trend analysis Critelli Company has provided the...Ch. 9 - Trend analysis Critelli Company has provided the...Ch. 9 - Analysis of financing corporate growth Assume that...Ch. 9 - Receivables and inventory turnover Thornhy Inc....Ch. 9 - Vertical analysis The condensed income statements...Ch. 9 - Profitability and stockholder ratios...Ch. 9 - Profitability and stockholder ratios...Ch. 9 - Profitability and stockholder ratios...Ch. 9 - Comprehensive profitability and solvency analysis...Ch. 9 - Comprehensive profitability and solvency analysis...

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