Question

GM Corporation ($ in millions) 2017 2016 BALANCE SHEETS ASSETS Cash & marketable securities $40,000 $50,000 Accounts receivable 260,000 200,000 Inventories 500,000 450,000 Total current assets 800,000 700,000 Net fixed assets 400,000 300,000 Total assets $1,200,000 $1,000,000 LIABILITIES & EQUITY Accounts payable $170,000 $130,000 Bank loan 90,000 90,000 Accruals 70,000 50,000 Total current liabilities 330,000 270,000 Long-term debt 400,000 300,000 Other liabilities 0 0 Common stock 350,000 350,000 Retained earnings 120,000 80,000 Total liabilities & equity $,1200,000 $1,000,000 INCOME STATEMENTS 2017 2016 Sales $1,500,000 $1,300,000 Cost of goods sold 900,000 780,000 Gross profit 600,000 520,000 Operating expenses: Selling, general & admin, 150,000 150,000 Marketing 150,000 130,000 Depreciation 53,000 40,000 Interest 57,000 45,000 Earnings before taxes 190,000 155,000 Income taxes 76,000 62,000 Net income $114,000 $93,000 Which of following is False? a. Accounts receivable rose, in part because of higher 2017 sales and in part because of customers’ faster payments. b. Inventory management apparently improved as inventory turnover rose in 2017. c. The dollar amount of net working capital rose in 2017 but the quick ratio fell, indicating that current liability rose faster than current assets. d. The dollar amount of net working capital rose in 2017 but the current ratio fell, indicating that current liability rose faster than current assets.

Answer 1

GM Corporation

We will prove the individual points using financial ratios.

1. Accounts receivables increased by $60,000. Why?

In 2017.

Receivables turnover ratio = net credit sales divided by Average Receivables

= 1,500,000 / (260,000)

=5.77 times

And Account receivables days = number of days in period divided by AR turnover ratio

= 360 / 5.77 = 62.4 days

In 2016

AR turnover ratio = 1,300,000/200,000

= 6.5 times

And Account receivable days = 56.2days

[ yes indeed AR has increased as a result of increase in Sale and increase in average credit days]

2. What's driving improvement in inventory management.

Inventory turnover = cost of good sold divided by average inventory

In 2017

900,000/500,000

= 1.8

In 2016

780,000/450,000

=1.73

[Inventory is actually still at the same level. Thus management of inventory is consistent hover the 2 years of operations)

3. Net working Assets

Current Assets - Current liability

In 2017

800,000 - 330,000 = $470,000

In 2016

700,000 - 260,000 = $440,000

Quick ratio.

(Current Assets - inventory) divided by Current liability

In 2017

(800,000 - 500,000)/ 330,000 = 0.91

In 2016

(700,000 - 450,000)/260,000 = 0.96

[This indicates that current assets improvement is driven by not liquid assets ]