Can inventory management tools, such as turnover and days in inventory, be used in a service company that doesn’t have significant levels of tangible inventory? Why is it important to manage costs in a service organization?
You have just been hired as an accountant for a large law firm. Your first project is to look at some financial information and determine why net income is declining. The senior partner tells you that total revenues for the company have increased each of the last five years. As a result, a proposal to substantially increase salaries for senior associates is being strongly considered. “A number of partners are preparing to retire, and we need to retain our best associates for future partnership,” he said. “No one else in the company has done any research as to why net income has gone down, so we are excited to see what you come up with!” How should you perform the analysis?