Activity Ratios and Earnings Quality Flashcards
what does accounts receivable turnover measure
the efficiency of accounts receivable collection
what does a higher a/r turnover imply?
customers may be paying their accounts promptly
what are ways to improve the a/r turnover ratio
-higher sales without an increase in receivables
-encouraging customers to pay quickly
what does a lower a/r turnover imply?
customers are taking longer to pay
what does days sales outstanding in receivables measure?
the average number of days it takes to collect a receivable
what does inventory turnover measure
the efficiency of inventory management
what does a high inventory turnover imply?
strong sales or that the firm may be carrying low levels of inventory
what does a low inventory turnover imply?
the firm may be carrying excess levels of inventory or inventory is obsolete
How can firms increase the inventory turnover ratio?
-higher sales without an increase in inventory balances
- reducing inventory levels
what does days’ sales in inventory measure
the efficiency of the company’s inventory management practices
what does accounts payable turnover measure
the efficiency with which a firm manages the payment of vendors’ invoices
what does a higher accounts payable turnover imply?
the firm is taking less time to pay off suppliers and may indicate that the firm is taking advantage of discounts
what does a lower accounts payable turnover imply?
the firm is taking more time to pay off suppliers and forgoing discounts
what does the fixed assets turnover ration measure
how efficiently the company is deploying its investment in net property, plant, and equipment to generate reveneues
what does a higher fixed asset turnover imply?
effective use of net property, plan, and equipment to generate sales
what does the total assets turnover ratio measure?
how efficiently the company is deploying the totality of its resources to generate revenues
what does a higher total assets turnover imply?
effective use of net assets to generate sales
What are the common benchmarks to use in ratio analysis?
- industry norm
- aggregate economy
- firm’s past performance
limitations of ratio analysis
- data is subject to estimation
- the ability to manipulate data to improve results
- an incentive to window dress financial statements to improve results (paying liabilities on the last day of the year to increase the current or quick ratio)
