Question

You are a Financial Manager for Dexter Manufacturing. Your sales were $1,000,000 in 2010, and $1,000,000 again in 2011. Your accounting department came to you recently and stated that the cash balance is much lower at the end of 2011 than it was in 2010. You calculate your Accounts Receivable and Inventory Turnover for 2011 and noticed that both of these ratios have DROPPED from 2010 to 2011! Describe in a couple paragraphs what has happened to Accounts Receivable and Inventory. Does this help explain why cash is running low in your opinion? What could you suggest to your management team to help improve these 2 ratios and to help increase cash?

Answer 1

Answer:-

• Accounts Receivable estimate by dividing sales by its accounts receivable.
• It provide how an efficiently company able to collect its debt.
• Lower accounts Receivable ratio means: - The Company is good for collecting its debt within the time.
• Inventory Turnover calculates by dividing cost of goods sold by its Average Inventory for same period. This ratio means company ability to convert the inventory into cash.
• Company significant amount are inverted in inventory that's way inventor turnover ratio is important.
• Let consider, this case Sales are increase 10lacs to 11lacs from 2010 to 2011, and accounts receivable ratio and inventory ratio is decrease.
• Decrease Accounts Receivable Means: - company able to collect its receivable within the time.
• Decrease Inventory Turnover ratio: - Company inventory holding time period is longer than previously holding time period that means company not able to converts its inventory into cash or sales within the time period.
• So that dexter manufacturing requires paying attention in inventory turnover ratio due to this cash in 2011 decrease as compair of 2010.
• For Improvement of Inventory turnover ratio company to increase it, sales.
• And maintain required inventory as per demand.
• Hence, this means the reason of cash decrease is dropped inventory turnover ratio.
• And therefore the purpose of increase the inventory turnover ratio company requires increasing its sales and Maintained inventory as per requirement.