Question 1
The performance of Jones electrical distribution has a systematic growth of net income and sales. For instance, in the year 2004, 2005, and 2006, the net sale was $1624, $1916, and $2242 correspondingly. Though, the sales decreased rapidly in the first quarter of 2007. The basic reason being there was a prior knowledge of a general economic downtown which would have slowed down the rate of the sales increase. Also, this company is still having difficulties with cash management as the cash level between the year 2004 and 2006 keeps fluctuating. This has been linked to delayed debt collection from customers and inventory management. In addition, the increasing rate of account payable of Jones Electrical was also noted by the bank. The decrease in sales in the recent past might also be related to the line of credit. Therefore, the success of Jones will require improvement on three main parts which are trade discount, inventory, and collection account receivable.
Firstly, the method of managing inventory must be improved. As shown in Exhibit 2, between 2004 and 2006, there was a rapid increase in inventory. Though, the amount of inventory was overestimated and resulted in a higher demand for the previous year.
Delegate your assignment to our experts and they will do the rest.
The need to forego the trade discount.
Improvement of the collection of account receivable.
Question 2
Regardless of making a good profit, account receivable, and increased amount inventory, Jones Electrical Distribution has to get some bank loans. One of the major cause might be the late payment from the debtors which make the firm run shortage of cash. This is proved by the low current ratio.
|
Year |
Current ratio |
Profit margin |
Inventory turnover ratio |
|
2004 |
475 / 222 = 2.14 |
14 /1624 = 0.86 |
1304 / 243 = 5.36 |
|
2005 |
562 / 294 = 1.91 |
29 / 1916 = 1.51 |
1535 / 278 = 5.52 |
|
2006 |
666 / 407 = 1.64 |
30 / 2242 = 1.34 |
1818 / 379 = 4.80 |
Question 3
The increase in account receivable and inventory balances can be linked to the increase in sales. It is a fact that if the sales increase rapidly, the company will increase the inventory level in order to increase production output and avoid stock-outs. Further, increasing sales also meant that the number of customers taking credit also increased simultaneously.
