Ratios are used to evaluate corporate financial performance. Prepare the Accounts Receivable and Inventory ratios using your Corporation's SEC 10K report.

• Discuss Ratio Analysis: Explain the purposes and uses of ratio analysis. How can internal and external use the tools to analyze a company's financial results or position?
• Accounts Receivable - Your SEC 10-K company should have accounts receivable and inventory, both typically large dollar values within the balance sheet. (For these questions, read the Notes to the Financial Statements presented immediately after the financial statements. This is usually part of section 8 of the SEC 10-K.)
  • Who owes money to your SEC 10-K company?
  • How is the inventory described?
• Analysis of Accounts Receivable and Inventory: Using the resources of our course materials, calculate and consider the concept of the financial ratios: days sales in Accounts Receivable (AR) and inventory. Due to limited information in the report, use the ending balances of inventory and accounts receivable when calculating these ratios (and not the average balance as the formulas require). This should allow you to compare this year to last year. Some companies require and analyze these values each month.

Formulas:

Days Sales in A/R = Ending Balance in Accounts Receivable/ [Sales Revenues / 365]

Days' Sales in Inventory = Ending Inventory Balance/[Cost of Goods Sold / 365]

Calculating ratios is only the first step in the analysis process. The ratios results need interpretation.

• What does the result indicate about the financial performance?
• Consider how these values are changing. Interpret these changes as positive or negative for the corporation. What can be done to counteract negative trends or continue with positive trends? What actions do you recommend management take?
• Also, relate changes in revenues and cost of goods sold values to changes in accounts receivable and inventory from year to year. Do the changes in revenues and cost of goods sold agree with the changes in accounts receivable and inventory?