Question

Standard Industry Classifications, How are you doing compared to others?

Please do not define SIC CODES OR ACCOUNTS RECEIVABLE as I already know what that is. Question 1 is the question. AND PLEASE LIST REFERENCES!!!

AND PLEASE LIST REFERENCES!!!

AND PLEASE LIST REFERENCES!!!

Standard Industry Classification codes (SIC) are used for financial statement “benchmarks” analysis. Your company’s financial results would need to be compared to others. SICs provide the format to compare a particular company’s financial data to their respective SIC-industry averages.

1. Explain how you would use SIC codes to analyze a Company Xs Accounts Receivable Turnover of four times per year versus a SIC rate of eight times per year.

Answer 1

The receivables turnover ratio is an activity ratio, measuring how efficiently a firm uses its assets. A high ratio implies either that a company operates on a cash basis or that its extension of credit and collection of accounts receivable is efficient.

Company X's account receivable trunover of 4 times per year while as per Standard Industry Classification (SIC) the rate is 8 times which is industry benchmark. So, the company X's receivable trunover ratios is less as compared to the industry benchmark rate. Hence, company X's account receivable ratio is not good as this ratio must be higher than the SIC rate, as noted above this ratio define how the company uses its assets efficiently and how strong its credit and collection policy is, so in this case company X's may have poor collecting processes, a bad credit policy or none at all, or bad customers or customers with financial difficulty. Theoretically, a low ratio can also often mean that the company has a high amount of cash receivables for collection from its various debtors, should it improve its collection processes. Generally, however, a low ratio implies that the company should reassess its credit policies in order to ensure the timely collection of imparted credit that is not earning interest for the firm.