Question

4-1: . You work as an analyst for the ACE Corporation and need to assess the firm's liquidity and cash position. • You have access to the following financial statement information for the company: Income Statement Sales Cost of goods sold Gross profit Fixed expenses EBITDA Depreciation EBIT Interest expense EBT Taxes (40%) Net Income 2016 920,000 340,000 580,000 310,000 270,000 160,000 110,000 67,000 43,000 17,200 25,800 2015 890,000 350,000 540,000 210,000 330,000 160,000 170,000 67,000 103,000 41,200 61,800 Balance Sheet Cash Accounts receivable Inventory Land and building Machinery Other fixed assets Accounts payable Notes payable Long-term debt Common stock Retained earnings 2016 72,000 44,000 90,000 238,000 122,000 141,000 105,000 98,000 145,000 196,000 163,000 2015 65,000 32,000 81,000 271,000 134,000 57,000 112,000 89,000 96,000 187,000 156,000 a. Calculate the number of the accounts receivable days (or days in receivables outstanding) in Year 2016. b. If the average industry number of the accounts receivable days (or days in receivables outstanding in Year 2016 is 10, explain whether the ACE Corporation is doing better or worse than the industry. Why yes or why not? Explain your answer. What is your recommendation to the company's management? c. Calculate the number of the inventory days for days in inventory outstanding) in Year 2016. d. If the average industry number of the inventory days (or days in inventory outstanding) in Year 2016 is 50, explain whether the ACE Corporation is doing better or worse than the industry. Why yes or why not? Explain your answer. What is your recommendation to the company's management? e. Calculate the number of the accounts payable days for days in payables outstanding) in Year 2016 f. If the average industry number of the accounts payable days for days in payables outstandine) in Year 2016 is 150, explain whether the ACE Corporation is doing better or worse than the industry. Why yes or why not? Explain your answer. What is your recommendation to the company's management? & Determine whether the ACE Corporation needs to borrow money to finance their business in Year 2016. Support your answer with both an explanation and calculations.

Answer 1

Answer : -

a) Days in Accounts Recievable = 15.077 Days

b) worse

c) Number of days in inventory = 91.79 Days

d) Worse

e) Number of Days in accounts payable = 116.48 days

f) worse

g) ACE corporation easly borrow money on 2016 aginst the asset of the company

.

Explanations :-

a) Number of Days in Accounts Recievable = (Avarage Gross account recievable / Credit sales ) × 365

Avarage accounts recievable = (accounts recievable in 2016+ accounts recievable in 2015 ) / 2

=( $44,000 + $32,000 ) /2

= $38,000

Days in Accounts Recievable = (Avarage Gross account recievable / Credit sales ) × 365

   =( $38,000 / $920,000 ) × 365

   = 0.0413043 × 365

Days in Accounts Recievable = 15.077 Days

.

b) The days in accounts recievable formula shows investors and creditors how well companies’ can collect cash from their customers , A lower ratio is more favorable because it means companies collect cash earlier from customers and can use this cash for other operations. bu here we are required more days in ccounts recievable than industry avarage , so it is worse than industry

.

C) Number of days in inventory = (Avarage Inventory / Cost of goods sold ) × 365

Avarage Inventory = (Inventory balance in 2015 + Inventory balance in 2016) / 2

   = ($81,000 + 90,000) / 2

= $85,500

Number of days in inventory = (Avarage Inventory / Cost of goods sold ) × 365

= (85,500 / $340,000) × 365

= 0.2514706 × 365

Number of days in inventory = 91.79 Days

.

d) Days of inventory is the average number of days it takes for a firm to sell off inventory. the average time in days that a company takes to turn its inventory, including goods that are a work in progress, into sales,a lower days sale in in inventory indicates the effective management of inventory and speedy selling of its goods or service and a higher days inventory indicates that a firm is not properly managing its inventory or that it has inventory that is difficult to sell and the managent is failed to convert the inventory into sale

and we required more days in inventoy(91.79 )dustry avarage (50 days) that is worse for the company

.

e)

Number of Days in Accounts Payable = (Avarage Accounts payable / credit purchase ) × 365

Avarage accounts recievable = (accounts payable in 2015 + accounts payable in 2016) / 2

=( $112,000 + $105,000 ) / 2

= $108,500

as per the question , we dont know the credit purchase , so we take cost of goods sold for the credit purchase

Number of Days in Accounts Payable = (Avarage Accounts payable / credit purchase ) × 365

= (108,500 / 340,000) × 365

= 0.3191176 × 365

Number of Days in accounts payable = 116.48 days

.

f) Number of days in accounts papyable is the average time (in days) that a company takes to pay its bills and invoices to its trade creditors, which include suppliers, vendors or other companies.companies having high days in payable indicates that we can use the available cash for short term investment and to increase their working capital and free cash flow , and we are taking lesser number of days to payment (116.48) than industry avarage (150 days), it is also worse for the company

.

g) if the company needs to borrow money to finance it's business, thn the lender will check several ratos like debt to equity and debt to asset ratios to claime the loans

Debt to Equity = Total Debt / Total Equity

Total Debt = short term liabilities + Long term liabilities = $105,000 + $98,000 + $145,000

   = $348,000

Total Equity = Commen stock + retained earnings =$196,000 + $163,000

   = $359,000

Debt to Equity = Total Debt / Total Equity

   = $348,000 / $359,000

   = 0.9694 or 96.94%

Debt To Asset Ratio = Total Debt / Total asset

Total Debt = short term liabilities + Long term liabilities = $105,000 + $98,000 + $145,000

   = $348,000

Total Asset = Current asset + fixed asset = $72,000 + $44,000 + $90,000 + $238,000 + $122,000 + $141,000

   = $707,000

Debt To Asset Ratio = Total Debt / Total asset

= $348,000 / $707,000

=0.4922 or 49.22%

by calculating the both ratio, total debts are less than equity and asset, and we have huge asset against the debt, so we can easly borrow money to finance the business operation