The Wright brothers are interested in purchasing the stock of ABC Remodel, a roo

Question

The Wright brothers are interested in purchasing the stock of ABC Remodel, a roofing company.   Before purchasing the stock, Mr. Wright would like to learn as much as possible about the company. However, the only information available is a portion of ABC Remodels annual report for the current year (2014), which contains only a summary of the ratios listed below:

                                    2014                2013            2012

Current ratio                                                   2.7:1                 2.4:1              2.2:1

Acid-test ratio                                                 0.7:1                 0.8:1              1.0:1

Accounts receivable turnover                   10.2 times        10.4 times      10.6 times

Inventory turnover                                    5.1 times          6.1 times        7.3 times

Return on total assets                                  16.00%             12.00%          11.00%

Return on common stockholders' equity       18.00%             15.00%          12.00%

Price-earnings ratio                                           12.1                  17.0               17.5

Earnings per share                                          $1.50                $1.49             $1.50

Are customers paying their accounts as well as they were in 2012? Support your answer with accounting justification citing specific information in the analysis.

Explanation / Answer

The account receivable turnover has gone down over the years that can have two implications either the net credit sales has gone down or the accounts receivable has gone up. So, if the second scenario has occurred then the customers are not paying their accounts as well as they were in 2012.

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