Question

16) Which of the following discoveries through the use of analytical procedures would most likely indicate a relatively high risk of financial failure? A) a decline in gross margin percentages B) an increase in the balance in fixed assets C) an increase in the ratio of allowance for uncollectible accounts to gross accounts receivable, while at the same time accounts receivable turnover also decreased D) a higher than normal ratio of long-term debt to net worth as well as a lower than average ratio of profits to total assets

Answer 1

C) an increase in the ratio of allowance for uncollectible accounts to gross accounts receivable, while at the same time accounts receivable turnover also decreased because it signifies deteriorating receivables quality and decreasing turnover, indicating potential cash flow problems and financial instability.

Step-by-step explanation:

An increase in the allowance for uncollectible accounts compared to gross accounts receivable signifies potential issues with collecting debts, while a decrease in accounts receivable turnover further compounds the risk by indicating slower collection.

This suggests a strain on cash flow and potential difficulties in meeting financial obligations, pointing towards a higher risk of financial failure. This situation could indicate customers are not paying their debts as expected, leading to potential liquidity problems for the company.

Moreover, the decreasing turnover of accounts receivable suggests that the company might be struggling to convert its sales into cash, affecting its working capital.

This combination of factors hints at underlying financial instability, making it a concerning sign for potential financial failure as it affects both short-term liquidity and the overall financial health of the business. Hence, therefore option c is correct.