AC300 Unit 9 Seminar

Write a 2-3 page paper that addresses the following:

Cash and Receivables

Please read the scenario carefully and work to correctly respond to the three questions posted at the end.

Scenario

Computers Inc. has completed its fiscal year on January 1, 2011. The auditor Kim has approached the CFO, Tom Lyons, regarding the year-end receivables and inventory levels of Computers Inc.

The following conversation takes place:

Kim: We are beginning our audit of Computers Inc. and have prepared ratio analysis to determine if there have been significant changes in financial position. This helps us guide the audit process. This analysis indicates that the inventory turnover has decreased from 5 to 2, while the accounts receivable turnover has decreased from 12 to 7. What is the explanation for this?

Tom: There is not a need to worry. These are leftover computers from the holiday season that were not sold. However, they will be sold in the next fiscal year - I am sure of it!

Kim: What makes you so confident we will be able to do this?

Tom: We will run fire sales and run a few more advertising campaigns.

Kim: And the receivables?

Tom: As you know, we are under a great deal of pressure as a company to increase sales. As a result, we lowered our credit standards to our commercial customers so that we would be able to sell products to a broader customer base. As a result of this policy change, we have been able to expand sales by 35%.

Kim: Your responses concern me.

Tom: I'm a little confused. Assets are good, right? Why don't you look at our current ratio? It has improved, hasn't it? I would think that you would view that very favorably.

Why is Kim concerned about the inventory and accounts receivable turnover ratios and Tom' responses to them?
What action may Kim need to take?
How would you respond to Tom' last comment?