You are analyzing ABC Company, a computer manufacturer. You notice that inventory turnover this year is significantly lower than prior years. You also notice that accounts receivable turnoveris significantly lower this year when compared to previous years.Provide three explanations that would be consistent with yourobservation for inventory turnover and include an explanation of whetherthese would be of concern to you, as well as what the effect might beon the next period’s financial results. In addition, provide threeexplanations that would be consistent with your observation of theaccounts receivable turnover, and also explain whether these would be ofconcern to you.

Just do response each posted down below # 1 to 3 only

Posted 1

Low Inventory Turnover:One reason inventory turnover may be low is due to a decrease in sales.This is probably one of the most common reasons. This may be a concernbut it can ultimately depend on the industry at the time as well as anycircumstances from the economy, and more. This may affect next period’sfinancial statements by its reflection of a decrease in net sales andcost of goods sold. The second reason for low inventory turnover isholding onto too much inventory (overstocking). This is a concernbecause a company may be ordering too much when there is not a demandfor it. The next period’s financial statements may look as ifshareholders’ equity is overstated due to an excess of inventory inassets. The last reason turnover may be low is because of obsolescence.This is a concern because companies may have a product that is out ofdate and essentially worthless. This can affect financial statements inthe next period because it may seem that the company has inventory thatcan be converted to cash (liquidity) when in reality they don’t. Allthey have is worthless inventory.

Low Accounts Receivable Turnover:Reasons for low accounts receivable turnover can result from a companyhaving a poor collection process, bad credit policies, or customers thatare not financially viable or creditworthy (Receivables Turnover Ratio,2019). This is a big concern because if a company is able to sell aproduct but cannot collect money from the customers who bought it,reflects not only issues regarding the customers who aren’t paying butalso the policies and collection strategies of the company with the lowA/R turnover ratio. This may reflect negatively in future financialstatements because the company will have a high number in A/R as well asa high number in the allowance for doubtful accounts.

Posted 2

Thedecrease in inventory turnover can be the result of overstocking theirproduct, decrease in sales, or a sudden change in the supply and demandof the product. All of these should be of a concern to the company.Overstocking can be from the inability to properly manage and overseethe need of raw materials and products for production leaving money lostin materials sitting. A decrease in sales can be from multiple issuesbut all will lead to concern for the company. The loss of demand foryour product can lead to the products you already produced go under aloss as you can not move the product. The decrease in accountsreceivable turnover is due to increase in bad debts, downturn in theeconomy, and inept in collecting the debts. These should be a concern asif you are unable to receive the payments owed your cash flow will becomprised. These results in the inability to pay of your debtors. Adecrease in the sales and enlivenment of payments both have a negativeimpact on the company. Also, not being able to properly assess thecompany debt and taking on bad debt brings forth lasting cash flowissues.

Posted 3

Hello professor and everyone,

Three explanations for a lower turnover rate are:

1. Changein method used for valuation of inventory. Changing from FIFO method toLIFO will result in a lower inventory turnover rate. Wondering thereason for this decision. Companies prefer a higher turnover rate.Knowing this would lower it, why make this change? Was it done to affectthe income statement?
2. Decrease in sales. By investigate the sales force as opposed to previous periods. This could be from the loss of human capital.
3. Increasein inventory levels. Looking at the reason why the inventory increasesdue to expansion, unable to move inventories or extra buy, etc. Thiswould increase assets in the balance sheet. Possibly concerning.

Three explanations for a lower accounts receivable turnover:

1. Decrease in debtor’s cash collections.
2. Increasein bad debts. By investigating the process and company’s policy inplace with extending customer credit. It could be that the company hasstarted to open more accounts to higher risk clients. It could also bean issue with human capital and not having the manpower” to collect onaccounts.
3. Decrease in sales. This run hand in hand with thelower turnover rate. Sales effectiveness has decrease or losing marketwith current products.

Overall, I would concentrate on better sales. Increase or change marketing strategy and the quality of the sales force.