Question

1. Define the accounts receivable turnover and the days sales outstanding ratios. What do these ratios tell us about a company’s accounts receivable?

2. What effect, if any, does a strengthening of the dollar have on reported sales and net income for companies operating outside the United States, when those foreign operations are translated to U.S. dollars for consolidation purposes?

3. How do companies test assets for impairment? If an asset is impaired, how do companies write them down?

4. What determines the effective cost of debt?

5. Define bond default. What are some potential ramifications if a company defaults on its debt?

Answer 1

1.Account receivable turnover is defined as the ratio of the net credit sales to the average accounts receivable. The days sales outstanding is defined as the total number of days divided by the accounts receivable turnover. these ratios indicate the number of days it takes for the business to collect the cash from the sales it does.

2. A strengthening dollar will mean that those currencies outside of the US will depreciate. Hence the reported sales and net income of these businesses will reduce because of the depreciating foreign currency.

3. Asset are tested based on the market value for these assets, are they increasing or declining. Next, they also have to check for any negative change in the technology. They have to evaluate as to whether the market value of the business is higher or lower than the book value and mark impairment appropriately.

4. effective cost of debt is the cost of debt which considers the tax effect. The effective cost of debt = pretax cost of debt *(1- tax rate)

5. Bond default means the bond issuing company is not able to make the interest payments or repay the principal. Potential ramifications are downgrading of the credit rating, no new investors and also having to face potential financial distress and bankruptcy.