Answer to Question #242772 in Accounting for Ana

Question

Problem 13.
A restaurant has the following statistical information calculated from its financial statements for the past three years:


Year 2018
Year 2019
Year 2020

Current ratio
1.04:1
1.25:1
1.40:1

Credit card turnover ratio
70 times
64 times
61 times

Accounts receivable turnover
18 times
24 times
31 times

Food inventory turnover ratio
37 times
28 times
22 times

Total liabilities to total equity
2.75:1
2.4:1
1.95:1

Return on shareholders’ equity
9.72%
9.51%
8.74%

Annual revenue
P875,400
P881,900
P879,300


Using this information, answer each of the following questions and explain your answer. A simple yes, no, more, less or maybe won’t do!

Answer 1

Solution:

a.). Current assets in relation to current liabilities are increasing. This is because the current ratio is increasing meaning that current assets are increasing more than the current liabilities.

 

b.). The restaurant is becoming less efficient in the collection of it credit card receivables. A high credit card turnover ratio is normally preferred since it indicates prompt payments of its credit cards are being made. The restaurant credit card turnover has been decreasing over the three years which is a bad signal as indicates that the company is poorly collecting its credit card receivables.

 

c.). The restaurant is becoming more efficient in the collection of its accounts receivable. A high accounts receivable turnover is normally considered the best since it indicates that a company’s collection of accounts receivable is efficient and that the company has a high proportion of quality customers that pay their debts quickly. The restaurant accounts receivable turnover has been increasing over the three years.

 

d.). Over the three-year period, more money has been tied up in food inventory. This is because the food inventory turnover ratio has been decreasing to low levels. A low inventory turnover ratio indicates poor sales and possibly excess inventory, that is the restaurant is overstocking. The restaurant’s inventory turnover ratio has been decreasing over the three-year period which is a warning trend that it is not managing its inventory efficiently.

 

e.). With the stockholders’ viewpoint in mind, profitability is not improving. This is because the return on stockholder’s equity is decreasing over the three-year period. A low return on stockholder’s equity means that the restaurant is not increasing its profit generation and indicates a less efficient usage of shareholders equity.

 

 

f.). If the restaurant needed to borrow capital through long-term debt, it would be easier to find a lender now than three years ago. This is because the total liabilities to total equity ratio is currently much lower than three years ago. A low ratio indicates that the restaurant is not over-reliance on debt and hence can easily get additional borrowing.

 

g.). The restaurant has been using leverage to the advantage of the stockholders over the three-year period. This is because the leverage ratio has been decreasing over the three-year period, which means that the restaurant is depending more on shareholders' equity rather than external debt to finance its operations.