...Coca-Cola Co. (KO) | Short-term (Operating) Activity Analysis Activity ratios measure how efficiently a company performs day-to-day tasks, such us the collection of receivables and management of inventory. * Ratios (Summary) * Inventory Turnover * Receivables Turnover * Payables Turnover * Working Capital Turnover * Average Inventory Processing Period * Average Receivable Collection Period * Operating Cycle * Average Payables Payment Period * Cash Conversion Cycle Ratios (Summary) Coca-Cola Co., short-term (operating) activity ratios | | Dec 31, 2010 | Dec 31, 2009 | Dec 31, 2008 | Dec 31, 2007 | Dec 31, 2006 | | Turnover Ratios | | Inventory turnover | 13.25 | 13.16 | 14.61 | 13.00 | 14.68 | | Receivables turnover | 7.93 | 8.25 | 10.34 | 8.70 | 9.31 | | Payables turnover | 18.61 | 21.98 | 23.32 | 20.91 | 25.93 | | Working capital turnover | 6.76 | 6.59 | 8.18 | 6.94 | 7.30 | | Average No. of Days | | Average inventory processing period | 28 | 28 | 25 | 28 | 25 | | Add: Average receivable collection period | 46 | 44 | 35 | 42 | 39 | | Operating cycle | 74 | 72 | 60 | 70 | 64 | | Less: Average payables payment period | -20 | -17 | -16 | -17 | -14 | | Cash conversion cycle | 54 | 55 | 45 | 53 | 50 | Source: Based on data from Coca-Cola Co. Annual Reports Ratio | Description | The company | | | | Inventory turnover | An activity ratio calculated as revenue divided by inventory...
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...Liquidity ratios Liquidity ratios measure the ability of a company to repay its short-term debts and meet unexpected cash needs. Current ratio. The current ratio is also called the working capital ratio, as working capital is the difference between current assets and current liabilities. This ratio measures the ability of a company to pay its current obligations using current assets. The current ratio is calculated by dividing current assets by current liabilities. 20X1 20X0 Current assets $38,366 $38,294 Current liabilities 27,945 30,347 Current ratio 1.4 : 1 1.3 : 1 This ratio indicates the company has more current assets than current liabilities. Different industries have different levels of expected liquidity. Whether the ratio is considered adequate coverage depends on the type of business, the components of its current assets, and the ability of the company to generate cash from its receivables and by selling inventory. Acid-test ratio. The acid-test ratio is also called the quick ratio. Quick assets are defined as cash, marketable (or short-term) securities, and accounts receivable and notes receivable, net of the allowances for doubtful accounts. These assets are considered to be very liquid (easy to obtain cash from the assets) and therefore, available for immediate use to pay obligations. The acid-test ratio is calculated by dividing quick assets by current liabilities. ...
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...used several ratios analysis including current ratio, gross profit (GP) margin, debt to equity ratio, and also average collection period. Based on the ratio analysis for liquidity, it is shown that HMI’s current ratio is 1.76, which is higher than 1.0. It means that HMI has ability to pay current liabilities using their assets that can be converted into cash in the near term. In term of profitability, the GP margin of HMI is only 32.6% from its revenues. From our analysis, it shows that HMI incur high cost of sale which leads to low gross profit. In term of debt to equity, HMI has ratio above 2.0 which is 2.97. It is quite dangerous for HMI because it puts their creditors at higher risks. Besides that, higher debt to equity ratio signal weaker balance sheet strength and often results in lower ratings. Last but not least, we measure the performance of HMI in term of activity ratio; average collection period. From our analysis, the average collection from its clients is within 43 days. It is quite a long period that HMI must wait to get their cash payment from the sales incurred. Longer collection period will lead to bad debt which also will affect the firm’s current assets. The table below shows the summary of HMI financial performance during 2011. RATIO ANALYSIS | 2011 | CURRENT RATIO | 1.76 | GP MARGIN | 32.6% | DEBT-TO-EQUITY RATIO | 2.97 | AVERAGE COLLECTION PERIOD | 43 days | Table 1: Financial performance of HMI during 2011 year ended Comparison of financial performance...
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...Casa de Diseno Industry Average Average Age of Inventory 110 Average Age of Inventory 83 Average Collection Period 75 Average Collection Period 75 Average Payment Period 30 Average Payment Period 39 a Operating Cycle 185 Cash Conversion Cycle 155 Resouce Investment Needed $11,253,425 b Operating Cycle 158 Cash Conversion Cycle 119 Resouce Investment Needed $8,639,726 c Operatioinal Inefficiency $2,613,699 x 15% $392,055 d 1 Offering 3/10 Net 60 Days ACP = 75 days x 60% 45 OC==83+45 128 CCC=OC-APP 89 Resources needed 26500000*89 $6,461,644 365 Additional Savings $969,247 2 Cost of Discount Sales x 45% Customers x 3% Discount $540,000 3 With Discount 40000000 x 80% 365/45 Days $3,945,205 Without Cash Discount 40000000 x 80% 365/75 Days $6,575,342 Casa de Diseno Industry Average Average Age of Inventory 110 Average Age of Inventory 83 Average Collection Period 75 Average Collection Period 75 Average Payment Period 30 Average Payment Period 39 a Operating Cycle 185 Cash Conversion Cycle 155 Resouce Investment Needed $11,253,425 b Operating Cycle 158 Cash Conversion Cycle 119 Resouce Investment Needed $8,639,726 c Operatioinal Inefficiency $2,613,699 x 15% $392,055 d 1 Offering 3/10 Net 60 Days ACP = 75 days x 60% 45 OC==83+45...
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...Industry Averages and Financial Ratios Paper FIN/370 RUNNING HEAD: INDUSTRY AVERAGES AND FINANCIAL RATIOS 2 ACME is looking for a bank loan to provide it with increased capital for its heater business. When deciding whether or not a company, like ACME, is financially healthy and would provide a return on the invested capital there are many tools available. By using a company’s financial statements, such as their balance sheet, we can get a small view of the heath of said business. Now by applying financial ratios and measurements towards the balance sheet, we can view the bigger picture which allows us to make a decision with far less risk in the end. First and foremost, let's discuss each ratio expressed on these financial statements as to better understand the context of how we use them to make decisions in the modern business environment. The current ratio measures the proportion of current assets to current liabilities, with this comes a rough measurement of a company’s financial health by giving us an idea of its ability to pay back its liabilities with its assets.. The acid test, or quick ratio, is a measurement designed to show a company’s ability to use cash assets to pay for short-term liabilities. Where the debt ratio measures the total debt of a company to its total assets allowing us to see what proportion of assets are financed by debt. Times interest earned...
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...the table below comparing the industry profit. | Mainwaring Engineering year ending march 2011 | Mainwaring Engineering year ending march 2012 | Industry averages of year march 2012 | Return on capital employed | 7.8% | 8% | 8% | Gross profit percentage | 48% | 44% | 40% | Net profit percentage | 76% | 4% | 75% | Stock turnover | 92 days | 4 days | 90 days | Debtor collection period | 58 days | 60 days | 55 days | Current ratio | 2.6:1 | 2.4:1 | 2.5:1 | Acid test | 1.5:1 | 1.3:1 | 1.4:1 | Return on capital employed (ROCE) To be able to work out the return on capital employed I had to calculate the net profit before tax / Capital profit * 100 and it will give you, your answer. Net profit before interest and taxCaptial employed ×100 Mainwaring engineering year ending March 2012 the Return on capital employed was 8% 69850×100 Mainwaring Engineering is going to be interested to see how well a company uses its capital employed as well as seeing the company’s long-term financing plans. Mainwaring Engineering returns should always be high than the rate at which they are borrowing to fund the assets. If Mainwaring Engineering borrow at 10% and can only aim to return 5%, they are going to be losing money. The return on capital employed in the ending of March 2011 was 7.8% and the Industry averages of year march 2012 was 8% and the company achieved 8% in the ending of March 2012 which means they have made an improvement from the year before and achieved their...
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...Chapter 14 Working Capital and Current Assets Management LearningGoals 1. 2. 3. 4. 5. 6. Understand short-term financial management, net working capital, and the related tradeoff between profitability and risk. Describe the cash conversion cycle, its funding requirements, and the key strategies for managing it. Discuss inventory management: differing views, common techniques, and international concerns. Explain the credit selection process and the quantitative procedure for evaluating changes in credit standards. Review the procedures for quantitatively considering cash discount changes, other aspects of credit terms, and credit monitoring. Understand the management of receipts and disbursements, including floats, speeding collections, slowing payments, cash concentration, zero-balance accounts, and investing in marketable securities. True/False 1. A firm that is unable to pay its bills as they come due is technically insolvent. Answer: TRUE Level of Difficulty: 1 Learning Goal: 1 Topic: Basics of Short-Term Financial Management 2. The short-term financial management is concerned with management of the firm’s current assets and current liabilities. Answer: TRUE Level of Difficulty: 1 Learning Goal: 1 Topic: Basics of Short-Term Financial Management 45 Gitman • Principles of Finance, Eleventh Edition 3. In the short-term financial management, the goal is to manage each of the firm’s current assets and current liabilities in order to achieve a balance between...
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...7.1 Receivable turnover ratio=Net credit sales/ [(Average accounts receivable)/2] =34,529.9/ [(1726.4+1194.8)/2] =34,529.9/1460.6 =23.64 =23.64*1460.6 =$34,528.58 This means that the company collected account credit sales 23.64 times in a year. Therefore the amount collected from customers in the year 2015 will be 7.2 Ratio analysis: a.) Trade receivable turnover is an effectiveness proportion or activity proportion that measures how frequently a business can transform its trade receivable into money during a period. As it were, the trade receivable turnover proportion measures how often a business can gather its normal trade receivable during the year. It is calculated using the formula below; Receivable turnover ratio=Net credit sales/ [(Average accounts receivable)/2] For example, if the trade receivable is equal to 2, it implies that the firm collected its trade receivables twice a year. It is recommended that the number of times of collection to be above two because, the firm is said to be efficient. An examination of the receivables to the business movement of a business is known as the trade receivable collection period. This examination is utilized to assess to what extent clients are taking to pay an organization. A low figure is viewed as best, since it implies that a business is locking up less of its assets in trade receivable, thus can utilize the assets for different purposes. Additionally, when receivables stay unpaid for a decreased timeframe...
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... Mary handles all tasks associated with collection of customer accounts. 2. Mary should not handle all aspects of accounts receivable, billing, and collection. Two different employees should mail invoices and record the amounts billed. Two employees should be present when the mail is opened. Another employee should be responsible for recording collections from customers. Finally, all employees should be required to take vacations, and there should be rotation of job duties among employees. 3. Someone should explain to Mary that she personally is not the problem but that a good system of internal control requires certain changes to be made. This could be explained to her not in the context of fraud but rather in the context of the necessity to verify and check the work performed by all employees. Problem 7-3 in the text found on page 355 (13 points) Accounts Receivable Turnover for Coca-Cola and PepsiCo (LO 2) 1. Accounts receivable turnover ratios: Coca-Cola: $24,088/[($2,587 + $2,281)/2] = $24,088/$2,434 = 9.90 times PepsiCo: $35,137/[($3,725 + $3,261)/2] = $35,137/$3,493 = 10.06 times 2. Average collection period: Coca-Cola: 360/9.90 = 36.36 days PepsiCo: 360/10.06 = 35.78 days Both companies have an average collection period of about 36 days. A collection period that averages just over one month, appears to be reasonable. 3. The turnover ratios and the average collection periods are very similar for the two companies....
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...open account.The company is operating at production levels that preclude volume discounts.Most supplies do not offer cash discounts and Casa de Diseno accounts payable showed that its average payment period is 30d days.Leal consulted industry data and found that the industry average payment period was 39 days.Investigation of six california furniture manufactures revealed that their average payment period was also 39 days. Next,leal studied the production cycle and inventory policies.Casa de diseno tries not to hold any more inventory than necessary in either raw materials or finished goods.The average inventory age was 110 days.Leal determined that the industry standard as reported in a survey was 83 days. Casa de diseno sells to all of its customers on a net-60 basis,in line with the industry trend to grant such credit terms on speciality furniture.Leal discovered by aging the accounts receivable,that the average collection period for the firm was 75 days.Investigation of the trade assoc.. and Calif. manufactures averages showed that the same collection period existed where net-60 credit terms were given.Where cash discounts were offered,the collection period was significantly shortened.leal beleived that if Casa de Diseno were to offer credit terms of 3/10 net 60,the average collection period could be reduced by 40 percent. Casa de Diseno was spending an estimated $26,500,000 per year on operating cycle investments.leal considered this expenditure level to be the...
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...| | | | | | | | | | | FINANCIAL STATEMENT ANALYSIS FOR HINOPAK MOTORS (2010) | | | | | | | | | | Financial statement analysis (or financial analysis) the process of understanding the risk and profitability of a firm (business, sub-business or project) through analysis of reported financial information, particularly annual and quarterly reports. Financial statement ratio analysis focuses on three key aspects of a business: liquidity, profitability, and solvency. | | | | | | | | | | Note: Figures in table are in thousand (000)LIQUIDITY RATIOSLiquidity ratios measure the ability of a company to repay its short-term debts and meet unexpected cash needs. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Current Ratios:Formula:Current Ratio = Current Assets / Current Liabilities | | | | | | | | | | Year | 2010 | | | | | | | | | Current Assets | 4793.61 | | | | | | | | | Current Liabilities | 3885.81 | | | | | | | | | Current Ratio | 1.233619245 | | | | | | | | | | | | | | | | | | | The current ratio is also called the working capital ratio, as working capital is the difference between current assets and current liabilities. This ratio measures the ability of a company to pay its current obligations using current assets. The current ratio is calculated by dividing current assets by current liabilities.This ratio...
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...information in the Chief Executive’s report and the impact of the purchase of the net assets of Roma Company. Chief Executive’s report To: Management From: Accountant Date: 7 December 2011 Subject: Financial Appraisal of Roma Company using Accounting Ratios Introduction The purpose of this report is to analyze the financial performance of Venice Ltd for the year ended 30 September 2011 compared to the previous year using the accounting ratios, and impact of the purchase of the net assets of Roma Company. The report specifically comments on the following ratios. 1) Return on year-end capital employed 2) Net assets turnover 3) Net profit margin 4) Current ratio 5) Closing inventory holding period 6) Trade receivables’ collection period 7) Trade payables’ payment period 8) Gearing The report also highlights of Venice’s performance for the year ended 30 September 2011: Return on capital employed Capital employed and operating profits are the main items. Capital employed may be defined in a number of ways. However, two widely accepted definitions are "gross capital employed" and "net capital employed". Gross capital employed usually means the total assets, fixed as well as current, used in business, while net capital employed refers to total assets minus liabilities. On the other hand, it refers to total of capital, capital reserves, revenue reserves (including profit and loss account balance), debentures and long term loans. ( http://www.accountingformanagement...
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...conduct a financial analysis. Team C has selected Walmart to conduct a comparative and ratio analysis to measure the company’s profitability and liquidity. Team C will use the following profitability ratios: earning per share, price earnings ratio, return on assets ratio, gross profit rate, asset turnover ratio, payout ratio and return on common stockholders’ equity ratio to analyze Walmart’s profitability over the last three years 2014, 2013, and 2012. In addition, to this Team C will use the following liquidity ratios: working capital, current ratio, cash ratio, inventory ratio, days in inventory ratio, receivables turnover ratio and average collection period to measure Walmart’s liquidity in 2014, 2013 and 2012. Walmart’s Profitability Profitability ratios measure the income or operating success of a company for a given period of time. According to My Accounting Course, “profitability ratios focus on a company’s return on investment in inventory and other assets. These ratios show how well a company can make profits from their operations” (2014, para. 1). Discussed here are Walmart’s comparative ratio analysis for gross profit rate, profit margin ratio, return on assets ratio, and asset turnover ratio. Gross Profit Rate Gross profit ratio shows the proportion of profits generated by the sales of products or services. The ratio reveals Walmart’s ability to create sellable products in a cost effective manner. Gross profit ratio is calculated by dividing gross...
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...receives create collections float, which is “bad” float. The clinic has $1,000 x 3 days = $3,000 in collections float. The clinics net float is $1,000: Net float = Disbursement (good) float – Collections (bad) float = $4,000 – $3,000 = $1,000. In essence, the balance on the firm’s books is $1,000 less than the balance shown on the bank’s books. 16.2 a. The annual cost of operating the lockbox system is $103,350: Total cost = (Fixed cost per month x 12) + (Number of locations x Number of transfers x Cost per transfer) = ($6,500 x 12) + (10 x 260 x $9.75) = $78,000 + $25,350 = $103,350. b. The annual benefit is $97,500: Benefit = Number of days saved x Payments per day x Carrying cost = 3 x $325,000 x 0.10 = $97,500. c. In this situation, the annual cost of the lockbox system is greater than the annual benefit, and hence the lockbox system should not be initiated. 16.3 a. Seattle must pay the bills in 20 days if it wants to take advantage of the discount of three percent. If it wants to take the costly trade credit (forego the discount), it must pay the bills in 60 days. b. Using the approximate cost formula, the cost is 27.8%. Discount percent 360 Approximate % cost = ────────────── = ────────────────────── 100 - Discount percent Days credit received - Discount period ...
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...= average age of inventory + average collection period = 110 days + 75 days = 185 days Cash conversion cycle = OC - average payment period (CCC) = 185 days - 30 days = 155 days Resources needed = cost of operating cycle investment x CCC 365 = $ 26,500,000 x 155 365 = $11,253,424.66 b. Industry OC = 83 days + 75 days = 158 days Industry CCC = 158 days - 39 days = 119 days Industry resources needed = $26,500,000 x 119 365 = $8,639,726.03 c. Casa de Diseno's cost of operational inefficiency : Needed resources $11,253,424.66 Less: needed industry resources $8,639,726.03 $2,613,698.63 x 15% $392,054.79 d. 1. Offering 3/10 net 60 : Average Collection period = 75 days x (100%-40%) (average collection could be reduced by 40%) = 45 days Operating cycle = 83 days + 45 days = 128 days Cash conversion cycle = 128 days - 29 days = 89 days Resources needed = $ 26,500,000 x 89 365 = $6,461,643.84 Additional saving = $2,178,082.19 = $326,712.33 2. Reduction in revenues as a result of the discount : = $40,000 x 45% x 3% = 540,000.00 3. Reduction in investment in accounts receivable and annual saving Average investment...
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