Fairfield Foods plc is a catering establishment which also owns shops and cafes. Due to increased competition the company has recently experienced declining profitability. In order to ascertain whether this is a sector-wide problem the directors wish to investigate this trend. As a result, they have acquired average ratios for the sector. Some of these equivalent ratios are shown below. Sector averages for the year ended 30 June 2020: Return on capital employed Operating profit margin Net asset turnover Inventory holding period Debt to equity The following information has been extracted from the draft financial statements of Fairfield Foods plc for the year ended 31 December 2020: Revenue Cost of Sales Gross Profit Statement of profit or loss for the year ended 31 December 2020: £'000 201,600 (140,000) 61,600 (35,280) 26,320 Operating expenses Profit from operating Non-current assets Inventory Equity: Equity shares of £1 each Extracts from the Statement of financial position as at 31 December 2020 £'000 Revaluation surplus Retained earnings Total Equity Non-current liabilities: 10% bank loan 18.6% 8.6% 2.01 110,000 7,920 4 days 80% 34,000 10,800 20,960 65,760 28,800

Fairfield Foods plc is a catering establishment which also owns shops and cafes. Due to increased competition the company has recently experienced declining profitability. In order to ascertain whether this is a sector-wide problem the directors wish to investigate this trend. As a result, they have acquired average ratios for the sector. Some of these equivalent ratios are shown below. Sector averages for the year ended 30 June 2020: Return on capital employed Operating profit margin Net asset turnover Inventory holding period Debt to equity The following information has been extracted from the draft financial statements of Fairfield Foods plc for the year ended 31 December 2020: Revenue Cost of Sales Gross Profit Statement of profit or loss for the year ended 31 December 2020: £'000 201,600 (140,000) 61,600 (35,280) 26,320 Operating expenses Profit from operating Non-current assets Inventory Equity: Equity shares of £1 each Extracts from the Statement of financial position as at 31 December 2020 £'000 Revaluation surplus Retained earnings Total Equity Non-current liabilities: 10% bank loan 18.6% 8.6% 2.01 110,000 7,920 4 days 80% 34,000 10,800 20,960 65,760 28,800

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Grant Communications is forecasting its financial statements for the upcoming year. Highlights include: Current assets of $6 million Current ratio of 2.0 Sales of $20 million Inventory turnover ratio (Sales/Inventory) of 6 The company's CFO is concerned about the forecasted inventory turnover ratio. Her goal is cut inventory enough to obtain an inventory turnover ratio of X, which is the industry average, while still maintaining sales at $20 million. If the company can accomplish this goal, the cash generated from the cut in inventories will be used to cut accounts payable. This will give the firm a Quick Ratio [(Current Assets - Inventory) / Current Liabilities] of 1.50. What is X, the desired inventory turnover ratio? Enter your answer, truncated to 2 decimal places. For example, enter 7.777 as 7.77.
Suppose you are conducting an analysis of the financial performance of Cold Goose Metal Works Inc. over the past three years. The company did not issue new shares during these three years and has faced some operational difficulties. The company has thus pilot tested some new forecasting strategies for better operations management. You have collected the company's relevant financial data, made reasonable assumptions based on the information available, and calculated the following ratios. Price-to-cash-flow Inventory turnover Debt-to-equity Ratios Calculated Year 1 Year 2 1.40 0.98 2.80 2.24 0.40 0.32 Year 3 0.78 1.79 0.26 Based on the preceding information, your calculations, and your assumptions, which of the following statements can be included in your analysis report? Check all that apply. A decline in the inventory turnover ratio could likely be explained by operational difficulties that the company faced, which led to duplicate orders placed to vendors. A decline in the inventory…
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