DOESN’T NEED GRAPHICS KEEP IT SIMPLE SOMETHING I CAN COPY AND PASTE WITH THE INFO

ACCT 280 Financial Accounting

Week 5 Discussion

Calculate essential financial ratios for your company

Calculate financial ratios for a second company of your choice

Compare the financial ratios of the two companies

REQUIRED: do the following activities and post your response to the questions below

Use the publicly-traded company you selected in week 1. You will continue to research and investigate the same company throughout the remainder of the course.

Citations: Cite your sources. Include links to your online sources at the bottom of your post. I should be able to click the link and find the source information you worked from.

Calculating Ratios

For this assignment you will need the most recent set of financial statements and the one that is exactly one year prior (older). Sometimes you will find multiple years presented in one set of financials. If not search the company’s website or do an internet search to find the previous financials. We are going to look at some of the ratios relating to financial assets in this assignment.

In order to calculate average accounts receivable and average inventory you will need 2 sets of financial statements – the most current and one year prior. Calculate a simple average by adding the related amounts from each year, then divide by 2.

For example, if the current year’s accounts receivable balance is $100,000 and the prior year’s is $90,000 we would add them together and divide by 2 to arrive at the average accounts receivable. ($100,000 + 90,000) = $190,000 / 2 = $95,000 average accounts receivable.

Follow the same procedure to calculate average inventory.

What these ratios mean

Accounts receivable and inventory are two of the most important assets for most companies. These assets are linked closely together and help us evaluate management. Let’s try to put this into a practicalperspective with a simple example.

Joe’s Grocery wants to sell their milk as fresh as possible, and they want to reduce inventory loss from spoilage. Ideally they want to keep enough milk on hand to meet customer demand but not buy too much and have expired milk that must be thrown away, at a loss.

If Joe’s milk inventory turnover rate is 52 their number of days in inventory is

365/52 = 7 days to sell inventory.

This should be easy to visualize quickly – there are 52 weeks in a year, 7 days per week, so the turnover of 52 directly relates to 1 week (7 days) in inventory.

Likewise, if a company has a 30 day accounts receivable policy, we would expect their accounts turnover rate to be around 12, or once per month.

365/30 = 12.17 accounts receivable turnover rate or,

365/12= 30.42 days in accounts receivable.

If we find this to be the case then we can infer that management has set good policies regarding extending credit to customers, is enforcing its accounts receivable policies, and is being proactive inminimizing loss from bad debt.

Part 1 Financial Ratios and Analysis

Refer to Chapter 14 in your text. There you will find coverage of financial ratios which are used to analyze financial statements. Use the ratio formulae you find there to answer the questions below. Show how you calculated your answers.

The ratios below are used to evaluate the effectiveness of Management on how well they use and control essential assets. Answer the questions below; calculate and report on each ratio:

Accounts Receivable Turnover Rate

Days to Collect Average Accounts Receivable

Inventory Turnover Rate

Days To Sell Average Inventory

Operating Cycle

What, if anything, can you infer from looking at your company’s accounts receivable turnover and inventory turnover rates?

Part 2 Comparison and Evaluation

Select one other company of your choice, find their most recent financial statements and one year prior (as above), and calculate the same ratios as above. Compare the second company with your company’s ratios and analysis, side-by-side.

Which company appears to be doing a better job of managing accounts receivable and inventory?

Explain why you came to these conclusions (quantify your conclusions).

Part 3 Notes to the financial statements

Read and report on the financial statement notes regarding accounts receivable and collections. What did management draw our attention to in the notes?

Read and report on the financial statement notes regarding inventory. What did management draw our attention to in the notes?

What does the company report about notes receivable?

Part 4 Market and News

Company news: Find and report on one or two significant news items, market analysis reports or press releases that were published within the past two weeks, about the company specifically. What influence do you think this information may have on investors either in the short term or long term?

Segment news: Find and report on one significant news item or market analysis report about the company’s market segment. What influence do you think this information may have on investors either in the short term or long term?

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