You are analyzing ABC Company, a computer manufacturer. You notice that inventor

Question

You are analyzing ABC Company, a computer manufacturer. You notice that inventory turnover this year is significantly lower than prior years. You also notice that accounts receivable turnover is significantly lower this year when compared to previous years. Provide three explanations that would be consistent with your observation for inventory turnover and include an explanation of whether these would be of concern to you, as well as what the effect might be on the next period's financial results. In addition, provide three explanations that would be consistent with your observation of the accounts receivable turnover, and also explain whether these would be of concern to you. I have the inventory turnover, just having a mind block with the receivables. Thank You!

Explanation / Answer

Answer: Inventory turnover relates to how long a company holds a product in the warehouse before it is sold to the consumer. It directly shows how the company sells a product and is very important from an investor’s point of view. The most common reason for a decrease in the inventory turnover ratio is demand for the product is down. If customers do not want the product you are selling than you will be holding more inventory than normal which is what causes this ratio to decrease. Another reason may be that the company did not take into account the sales cycle for the product they sell.

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