Discussion Topic 1: Sandra and TravisImexComputer Company ha
Discussion Topic 1: Sandra and TravisImexComputer Company has completed its fiscal year on December 31, 2010.The auditor, Sandra Blake, has approached the CFO, Travis Williams,regarding the year-end receivables and inventory levels of Imex. Thefollowing conversation takes place:Sandra: Weare beginning our audit of Imex and have prepared ratio analyses todetermine if there have been significant changes in financial position.This helps us guide the audit process. This analysis indicates that theinventory turnover has decreased from 5 to 2.8 and the accountsreceivable turnover has decreased from 12 to 8. I was wondering if youcould explain this change in operations.Travis: Thereis little need for concern. The inventory represents computers that wewere unable to sell during the holiday buying season. We are confident,however, that we will be able to sell these computers as we move intothe next fiscal year.Sandra: What gives you this confidence?Travis: Wewill increase our advertising and provide some very attractive priceconcessions to move these machines. We have no choice. Newer technologyis already out there, and we have to unload this inventory.Sandra: …and the receivables?Travis: Asyou may be aware, the company is under tremendous pressure to expandsales and profits. As a result, we lowered our credit standards to ourcommercial customers so that we would be able to sell products to abroader customer base. As a result of this policy change, we have beenable to expand sales by 35%.Sandra: Your responses have not been reassuring to me.Travis: I’ma little confused. Assets are good, right? Why don’t you look at ourcurrent ratio? It has improved, hasn’t it? I would think that you wouldview that very favorably.Whyis Sandra concerned about the inventory and accounts receivableturnover ratios and Travis’ responses to them? What action may Sandraneed to take? How would you respond to Travis’ last comment?Just do response each posted # 1 to 2Posted 1Sandra is concerned about the inventory and accounts receivable turnoverratios because of the considerable decrease in both ratios. Theinventory turnover ratio decrease means there’s been a decrease in theamount of time it takes to turn the inventory into cash. The decrease inaccounts receivable turnover ratio tells Sandra that the company’saverage collections are taking longer. These ratios could have decreaseddue to Travis’s explanation of the computers not being sold during theholiday season, but as an auditor I would have an obligation to digfurther into the decreases in these ratios, as there may be otherreasons for concern. Travis’ responses don’t hold much weight at thispoint. They have lowered their credit standards and expanded sales, butif those sales are on credit and the accounts receivable turnover is lowthey are not efficiently turning the sales into profit. To respond toTravis’ last comment, the current ratio is the company’s ability to payit’s current liabilities, typically an improvement in this ratio isfavorable, however we must look at the accounts involved in thecalculation. For example, it could be possible the company moved some ofits short term financing into long term.Posted 2Hello Class and Professor,Sandra is concerned because, Inventory should have sold rather highin the holiday season. If it could not be sold then, then how is the CFOso sure it can be sold at all especially with newer software alreadyout. And why would he waste more money on advertising old merchandise?Sandra should invest the current ratio numbers. If the other numbers arenot appealing then this one could be doctored to make her find itfavorable.
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