Ms. Smith, owner of Smith Dental Supply Company, and has been in business for one year. She applied for a $150,000 loan from her bank. The remaining request for the loan after the $100,000 for new equipment is to pay off some of her expenses and bills. The bank requested financial statements for her shop as a basis for considering her loan request. Another measure the loan officer will use in assessing the viability of Ms. Smiths loan request will be to compute the Accounts Payable Turnover ratio. Ms. Smith is confused by this ratio and how it relates to her request for a loan. She asks her accountant to explain why the loan officer will use this as one measure to ascertain if she qualifies for the $150,000 loan if she has a solid balance sheet.

Discuss this ratio and why it is important (or not) in reviewing Ms. Smiths loan request. Without getting into the dollar amount details a few things to remember:

• She has been in business a year.
• Sales are lagging behind her projections.
• Cost of goods seem to be higher than she thinks they should be.
• She questions why there is depreciation expense which is lowering her net income.
• Her accounts receivable are high (the aging showed 3-6 months to collect).

Also, determine if she is accurate in her claim that the balance sheet should be enough. What else on the balance sheet can be of concern?