Generally Accepted Accounting Principles and Collection Period Ratio
Jason Lee
Case #6
Date: 02/16/2011 1. Calculation of Ratios a. Liquidity Ratios i. Current Ratio = 1,354,535 / 675,252 = 2.0059 ii. Quick Ratio = 786,114 / 675,252 = 1.164 b. Leverage Ratios i. Debt Ratio = (675,252 + 564,390) / 2,015,677 = 1.5974 ii. Debt to Net Worth Ratio = (675,252 + 564,390) / 776,036 = 1.5974 iii. Times Interest earned ratio = (165,234 + 119,658) / 119,658 = 2.3808 c. Operating Ratios i. Avg. Inventory turnover = 2,625,340 / [(627,853 + 568,421) / 2] = 4.3891 ii. Avg. Collection Period = 3,897,564 / 507,951 = 7.6731 = 365 / 7.6731 = 47.59 days iii. Avg. Payable Period = 2,565,908 / 241,881 = 10.61 = 365 / 10.61 = 34.4 days iv. Net sales to total assets = 3,897,564 / 2,015,677 = 1.9336 d. Profitability Ratios i. Net profit on sales = 165,234 / 2,015,677 = 4.24% ii. Net profit on assets = 165,234 / 3,897,564 = 8.20% iii. Net profit on equity = 165,234 / 776,036 = 21.29% 2. James Confectioners’ major problem lies with their operating ratios and profitability ratios. As you can see from the given chart of case 6 you can find out there was a huge increase on their Avg. collection period and payable period. It is possible for James Confectioners to experience such outcome of the business due to increasing cost of raw materials. Increased cost of raw material will decrease the Avg. inventory turnover rate because firms will not stock up their inventory during time when raw materials are expensive. It will also affect firm’s collection period ratio because of the production matter. Fewer productions will cause increase on collection period which will incur lost of money. Since cash flow is slow during this stage a firm would have longer period on payable turnover as well. Net profit on sales shows how much James Confectioners have lost
Case #6
Date: 02/16/2011 1. Calculation of Ratios a. Liquidity Ratios i. Current Ratio = 1,354,535 / 675,252 = 2.0059 ii. Quick Ratio = 786,114 / 675,252 = 1.164 b. Leverage Ratios i. Debt Ratio = (675,252 + 564,390) / 2,015,677 = 1.5974 ii. Debt to Net Worth Ratio = (675,252 + 564,390) / 776,036 = 1.5974 iii. Times Interest earned ratio = (165,234 + 119,658) / 119,658 = 2.3808 c. Operating Ratios i. Avg. Inventory turnover = 2,625,340 / [(627,853 + 568,421) / 2] = 4.3891 ii. Avg. Collection Period = 3,897,564 / 507,951 = 7.6731 = 365 / 7.6731 = 47.59 days iii. Avg. Payable Period = 2,565,908 / 241,881 = 10.61 = 365 / 10.61 = 34.4 days iv. Net sales to total assets = 3,897,564 / 2,015,677 = 1.9336 d. Profitability Ratios i. Net profit on sales = 165,234 / 2,015,677 = 4.24% ii. Net profit on assets = 165,234 / 3,897,564 = 8.20% iii. Net profit on equity = 165,234 / 776,036 = 21.29% 2. James Confectioners’ major problem lies with their operating ratios and profitability ratios. As you can see from the given chart of case 6 you can find out there was a huge increase on their Avg. collection period and payable period. It is possible for James Confectioners to experience such outcome of the business due to increasing cost of raw materials. Increased cost of raw material will decrease the Avg. inventory turnover rate because firms will not stock up their inventory during time when raw materials are expensive. It will also affect firm’s collection period ratio because of the production matter. Fewer productions will cause increase on collection period which will incur lost of money. Since cash flow is slow during this stage a firm would have longer period on payable turnover as well. Net profit on sales shows how much James Confectioners have lost