Footpedal Enterprises has been in business for five years. This past year was th
ID: 2350040 • Letter: F
Question
Footpedal Enterprises has been in business for five years. This past year was the best year yet, as demonstrated by several indicators shown below:2008 2007 2006 2005 2004
Inventory turnover 5.2 4.7 4.3 4.5 4.1
Accounts Rec. turnover 6.0 5.7 5.4 5.4 5.3
Gross Profit Margin 23.2 22.8 22.9 22.6 21.8
Operating Profit Margin 12.1 12.0 11.9 11.8 11.9
Your new assistant wonders why upper management is so happy that the inventory turnover, the accounts receivable turnover, the gross profit margin, and the operating profit margin all increased this year. Explain why an increase in each of these items is a positive indicator.
Explanation / Answer
Inventory Turnover: An increase in this figure means that there is a high degree of turnover of the goods you are selling, likely meaning that you are selling more goods now than you were. A/R Turnover: This means that your debtors are paying off the debts they owe to you more frequently. This is also good because it increases cash flow and mitigates the likelihood that a debt will go uncollected. Gross Profit Margin: This is the margin on the profit you are making on the goods that you sell. (Sales - COGS = Gross Profit; GP Margin = Gross Profit/Sales). The higher your margin, the more profit you are making on your goods. These profits can now be used to cover other expenses (e.g. operating expenses). Operating Profit Margin: This is the margin on the profit left over after you have covered your operating expenses. An increase in this number could mean that you are controlling operating expenses more effectively than you were. Hope that helps. Please rate.