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Discussing Inventory Turnover and Accounts Receivable Turnover

Analysts maintain that two of the most important ratios are inventory turnover and accounts receivable turnover.

1. You are analyzing 2112 Company, a guitar manufacturer. You notice that inventory turnover this year is significantly lower than prior years. Provide two explanations that would be consistent with this observation. Explain whether each of these would be a good sign or if each would be a concern to you and what the effect might be on the next period's financial results.

2. You are analyzing 2112 Company, a guitar manufacturer. You notice that accounts receivable turnover this year is significantly lower than prior years. Provide two explanations that would be consistent with this observation. Explain whether each of these would be a good sign or if each would be a concern to you and what the effect might be on the next period's financial results.

Solution Preview

1. Lower turnover means that customers are taking longer to pay.
Turnover of 1 = 365 days
Turnover of 2 = every six months
Turnover of 12 = once a month
Turnover of 24 = about every two weeks
So, the lower the turnover, the more days in AR (longer to collect)

Inventory turnover is COGS/Average Inventory
Lower turns means inventory, on average, is moving slower.

A. It could be lower this year because this year's Christmas season was terrible and you have more than usual levels of unsold guitars on hand. Earlier in the ...

Solution Summary

Your tutorial is 326 words and gives you two possible business reasons that reduce each turnover's ratios. The ratio is given along with a general interpretation for a lower turnover on each.

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