Question

Question 2. Anestation Hati Below are the ratio of Heta firm in 2013 & 2014 Account receivable turnover 2016 Day's in Inventory 9 75days 1 days Indicate whether both the above ratios are favorable o unfavorable in 2014 compared to 2013 and why? (2 marks) b. Explain what you understand from the trend of account receivable turnover ratio (2 marks)

Answer 1

Information Given
	2013	2014
Account Receivable Turnover	3.9	4
Day's in Inventory	75 Days	82 Days
Answer to a
Accounts Receivable Turnover
This indicates how effective the collection is, in the company. Higher the ratio higher is the effective collection process/method of the company.
Hence, in 2014 same is favourable.
Formula for above is	Net Credit Sales / Average Accounts Receivable
Where
Net Credit sales is	Total Credit Sales less Sales return
Average Accounts Receivable	is the Average of opening & closing accounts receivable
Day's in Inventory
It shows how long does a company take to convert inventory into sales
Higher the number, higher does it take to convert into sales.
Henec, in 2014 Inventory Days is not favorable.
Answer to b
Account receivable turnover ratio has increased in 2014 over 2013.
This shows that colllection has improved over the year.
This could be because company might have added good customer in their portfolio whose payment terms are good.
Also, company might have able to get the old dues cleared fast thereby improving the ratio.
Answer to c
Suggestions for improvement of Accounts receivable turnover ratio
1 Clear the old dues / over aged dues quickly.
2 negotiate the terms of collection with the client i.e. reducing the number of days of collection from say 45 days to 30 days.
Answer to d
Trend of days in Sales inventory ratio
1. Inventory is not turning into sales that fast that it used to be in 2013.
2. This could be because company started piling up inventory with the expectation of quick sales in future.
3. Also, there might be certain inventory / stocks which became obsolete and needs reconsideration whether to hold the same or not.
4. Company might have bought stock during the year end.