Chapter 13 (Financial indicators) Flashcards
13:2
Define “Inventory turnover.”
A financial indicator that measures how quickly a business is turning its inventory into sales, measured in days.
If the ratio is a larger amount of days then the turnover is slower. However, the smaller the ratio is the faster the turnover of inventory is.
13:2
List the examining factors of Inventory turnover.
1: IV turnover in previous periods. This can be compared to the current rate of turnover to see how a business is performing in terms of its movement of inventory.
2: How does the current rate of Turnover compare to what was budgeted or expected by management for the period?
3: Is the IV turnover rate what it should be for that particular inventory item?
13:2
List some strategies for the improvement of inventory turnover.
: To reduce the selling price of slow-moving items as a method of clearing them from a business. This will eliminate this slow-moving item and make the average rate of turnover for the business faster.
: To introduce complementary items to that slow-moving item to increase its sales and achieve a faster rate of turnover for the business.
: Depending on the kind of trading business, they can place the slow-moving items at the front of a store to try and increase sales, which achieves a faster turnover rate of that item.
: A business can reduce the quantity of inventory they will hold on hand at a particular time. As with a lower quantity of inventory on hand the faster the turnover rate will be. This can be achieved through “just-in-time ordering.” This means to order inventory when a minimum value set by the business is reached to ensure they don’t miss out on potential sales.
13:2
List some reasons for a faster inventory turnover rate.
: An increase in sales of a particular item, resulting from increasing demand for that product.
: A reduction in the selling prices for slow-moving items often is the cause of the inventory turnover rate for a business to become faster.
Income statements:
Define “gross profit margin.”
The sales of a business with a deduction of the cost of those goods sold.
This indicator measures the mark-up in the business (the difference between the selling price and the cost price of their inventory).
Income statements:
Define “net profit margin.”
This indicator takes into account all other business expenses which are deducted from the adjusted gross profit of a business.
Net profit margin acts as a measure of a business’s expense control.
13:4
Define “accounts receivable turnover.”
A financial indicator that measures the average number of days taken by a business to convert their accounts receivable assets into actual cash.
13:4
List some improvement strategies for “Accounts receivable turnover.”
-To offer discounts to credit customers, as a means of incentivising them to pay off their debts quicker, which improves the speed of Accounts receivable turnover.
-To threaten any credit customers who aren’t paying their debts with legal action, or even to send constant reminders to pay their debts.
-A business can also tighten up their credit terms, to ensure their credit customers pay faster, which improves the speed of Accounts receivable turnover.
13:5
Define the “cash cycle.”
This is the cycle of a business converting its inventory into sales (measured through inventory turnover) and its sales into cash (measured through accounts receivable turnover).
It’s calculated through the sum of both the Accounts receivable turnover and the Inventory turnover of a business.
13:5
Why is the cash cycle important?
The cash cycle measures the overall liquidity of a business’s two most crucial current assets, which directly correlates with the business’s ability to meet its short-term debts.
As this is how quickly a business is receiving cash from its investments.
13:6
Define “Accounts payable turnover.”
The number of days taken on average by a business to settle their accounts payable debts.
Note that the accounts payable turnover of a business is strongly linked to the cash cycle of a business, as this measures a business’s liquidity and ability to pay off its short term debts.
