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Performance Evaluation Shayna Holt Capella University Accounting Methods for Leaders (MBA 5010) June 2020

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Introduction Ace Company is requesting a $3 million 10-year loan. They will utilize this loan to purchase production equipment and develop accompanying software. When deciding whether to approve or decline the loan request, management needs to evaluate Ace Company’s Account Receivable Collections, their average inventory turnover rate compared to the average industry inventory turnover rate and their short-term and long-term creditworthiness.

Accounts Receivable Collections According to Ace Company’s Balance Sheet, the accounts receivable account has continued to increase over time. The accounts receivable turnover for 2016 was 4.68 times and for 2017 was 5.06 times. “Accounts Receivable occurs when suppliers of goods and services sell their products on credit and thus allow the customer to defer payment to a later date” (Retnosari 2018). According to the company data, all sales by consumers are purchased on credit. This can be a dangerous practice, as consumers can not pay the balance in full. “Cash and receivables are part of a component of working capital so that the velocity of cash and accounts receivable (Retnosari 2018). In 2016, they were collecting its accounts receivable on an average of 4.68 times a year and an average of 5.06 times per year in 2017. With the increase, consumers are continuing to pay off the credit and paying ore often as well. The company is collecting its debt at a higher rate; therefore, increasing the cash flow yearly. Inventory Turnover Rate “Inventory turnover rate (ITR) is the ratio of the inventory used to measure the number of times the funding that was planned in the preparations (inventory is spinning in one period)” (Umniati 2016). Therefore, it shows how quickly a company sells its inventory once it comes into their

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possession. The higher the number, the more the company is moving inventory out the door. However, the abundance of inventory that is being purchased can affect this majorly. If the company receives a discount for purchasing a higher amount of inventory. If a company over purchases, the ratio is going to be lower than it would be not over purchasing. The industry average turnover ratio is 10 times. Ace Company’s average turnover for 2016 was 1.94 and 1.82 times in 2017. This is not the representation of cash flow, but rather how well they manage their inventory. Short-Term and Long-Term Creditworthiness When examining a company’s creditworthiness, a manager needs to examine the company’s credit score, the debt the company has and their ability to repay the debts. Several financial ratios will assist in evaluating a company’s ability to repay their liabilities is their total debt to equity ratio. The lower the ratio, the better the ability to repay. In 2016 Ace Company’s debt to equity ratio was 3.78 and 2.49 in 2017. With the ratio decreasing, they are paying off the current debt they owe. Their debt is decreasing over the years. The next ratio to evaluate is the interest earned ratio. This ratio reflects the ability to pay the debt based on their current income. In 2016, Ace Company’s interest earned was eight times and in 2017 it was 10.2 times. This shows Ace Company’s can pay more of their interest payments. As the ratio increases, their ability to pay the interest increases. The last ratio to evaluate is the current ratio. The current ratio measures a company’s ability to convert their current assets into cash to pay their short-term liabilities. In 2016, Ace Company’s current ratio was 1.53 and in 2017 the current ratio was 1.79. with the ratio increasing shows their current assets have increased while their current liabilities have remained the same. This provides Ace Company a stronger ability to pay off their shortterm obligations.

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Recommendation Based on the research done using the financial statements and financial ratios from Ace Company, the request for a $3 million 10-year loan should be approved. The increased ability to pay off the obligations they have incurred approves they can pay any new obligations taken on by Ace Company. Also, Ace Company has increased their gross profit rate from 47.2% in 2016 to 50% in 2017. They have grown as a company by increasing their profits and decreasing their current obligations. The inventory rate may still be a concern. However, it needs to be emphasized this low rate could be a result of purchasing inventory in bulk due to a volume discount. All-inclusively, Ace Company is worth the extension of the loan. They are credit worthy and are continuously increasing their revenue. With approving the loan, Ace Company will have the ability to increasing their revenue even more.

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References Paul, Salima Yassia; Guermat, Cherif; Devi, Susela. Journal of Accounting in Emerging Economies; Bingley Vol 8 Iss. 2, (2018): 166-184. Retnosari, R. (2018). Analysis Cash Turnover Receivable Turnover. Journal Ilmiah Akuntansi Dan Keuangan, 3(2), 41-50.

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Appendix

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