P 6-19 J.A. Appliance Company has supplied you with the following data regarding work- ing capital...

P 6-19 J.A. Appliance Company has supplied you with the following data regarding work- ing capital and sales for the

years 2011 2010, 2009.

Working capital $270,000 $ 260,000 $ 240,000

Sales $650,000 $600,000 $ 500,000

The industry average for the ratio of sales to working capital. 4.10 times 4.05times 4.00times

Required a. Compute the sales to working capital ratio for each year.

b. Comment on the sales to working capital ratio for J.A. Appliance in relation to the industry average and what this may indicate.

Solutions

Expert Solution

Sales to working capital Ratio = Sales / Working Capital

Sales to working capital Ratio 2011= 650000 / 270000 = 2.41
Sales to working capital Ratio 2010= 600000 / 260000 = 2.31
Sales to working capital Ratio 2009= 500000 / 240000 = 2.08

b)
Sales to working capital Ratio indicates how efficient any firm in generating more sales by inducing more working capital in the firm or it can also be said how efficiently firm utilised the working capital to generates sales. Thus higher the ratio less working capital is required to generate given amount of sales.
Looking at the industry ratios, it can be clearly stated that J.A. Appliance Company not at all efficient in managing their Account receivables, Account payables and Inventory (Working Capital). Their Sales to working capital is almost 60% of industry average.
Though it is improving year by year from 2.08 (in 2009) to 2.41 (in 2011) but it is still lower than industry (4.10 in 2011)

ekkarill92 answered 1 year ago

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