For this discussion, assume that you are an investor and considering the buyout

Question

For this discussion, assume that you are an investor and considering the buyout of an existing publicly traded company. There are several areas you plan to focus on during your due diligence process in order to determine the organization's potential as a long-term investment. Discuss the key factors you would evaluate on the statement of cash flows and what significance the income from operations line item has on your decision. In addition, discuss why the accounts receivable turnover rate and accounts payable turnover rate would be of interest in your decision making. Lastly, explain what meaningful insight you might obtain by reviewing the sales allowances and sales discounts amounts for this company.

Explanation / Answer

Income from Operations - Is very important and a key indicator on whether the company is making money the way it should be in it's current business. If the company is making money and profits outside of it's core business operations you should do more investigating and may want to consider another company that aligns better with it's operations.

Accounts Receivable should be relatively small in relation to monthly sales. If it is high, this could signal a collection problem from customers which would hinder and investment. It also could mean that addition resources are needed in the collections deparment which will subtract from the buttom line profitability.

Accounts payable rate should be high which means you have small order sizes coming in and are paying vendors in a timely manner.

By reviewing the sales allowances and discounts, it lets you determine how strong of a market the company is operation on. If there are high allowances and discounts, this could signal week demand for the product being produced and can cause concerns in your investment decision.

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