Credit Analysis

Consider each of the following situations independently of each other. For each of the situations provide one example of when the underlying circumstances may be such that the observed trend is unfavorable, and one example of when the underlying circumstances are favorable.

1. Current ratio increases from one period to the next
2. Accounts receivable turnover increases from one period to the next
3. Accounts payable turnover increases from one period to the next

Just do response each posted # 1 to 3 down below only

Posted 1

Good afternoon class,

Current ratio increases from one period to the nextIf
a current ratio is too high, then it suggests that the company isn’t
using its resources to their full effect. So, an unfavorable increase
would be if the ratio jumped from 1.5% to 5%. A favorable increase, on
the other hand, would a moderate increase, such as from 1.5% to 2%,
which resulted from increased sales.

Accounts receivable turnover increases from one period to the next

An
instance of when an increase in accounts receivable is actually
unfavorable would be if credit sales have declined: this is bad because
the ratio is only increasing because fewer sales have been made. An
example of a laudable increase in accounts receivable would be if the
collection department and credit policy encourage customers to pay in a
timely fashion.

Accounts payable turnover increases from one period to the next

An
example of an unfavorable increase in accounts payable would if the
company isn’t drawing the maximum amount of interest on its cash.
However, if the credit terms specificity a more favorable discount than
interest drawn, early payment is favorable.

Posted 2

Favorable-
When current ratios increase, it could be due to increase in cash and
marketable securities. When the demand decreases, a business will end up
with more inventories in stock which could also increase current
ratios. This is unfavorable as the ratios is affected by the leftover
inventory which could have been sold to the customers.

When
customers are making quick payments or the business is able to collect
their funds right away for the sales/services they provide, the account
receivable turnover ratio would increase. This is favorable as the
account receivable turnover is affected by positive changes. The
unfavorable could be when a business is not able to sell or they have
lower sales. This could also change the accounts receivable turnover
ratio. The change in ratios for this reason will be unfavorable and the
sales of business are decreasing.

When accounts payable turnover
increases from one period to another, it could be because a business may
made payments very quickly to their supplier and vendors. This can be
considered favorable. The unfavorable increase in accounts receivable
could be due to limiting of credit provide from suppliers and vendors.

Posted 3

Hello all,

Current ratio increases from one period to the next

Unfavorable – if the increase is resulted from very aged account receivables balance driving up the current asset balance.

Favorable – if the company is paying down its current obligation while maintaining relatively higher current assets.

Accounts receivable turnover increases from one period to the next

Unfavorable
– if the increase is resulted by a decrease in receivables due to
overly restrictive credit policy to the extent where it adversely
reduces sales

Favorable – if the increase is resulted by improved collection of receivables and or increased sales

Accounts payable turnover increases from one period to the next

Unfavorable – if the rate keeps growing then the company might be missing out on utilizing one of the cheapest sources of financing.

Favorable – in order to negotiate favorable credit terms with suppliers.

2 hours ago