Question 1 (25 marks)

Worldwide Communication Ltd. is a trading company selling computer accessories. After the companys financial report has come out on December 31, 2021 with the below information:

	Dec. 31, 2021	Dec. 31, 2020	% Change
Current Ratio	2.5	1.9	31.58%
Total Assets Turnover	0.5	0.3	66.67%
Inventory Turnover	3.2	2.7	18.52%
Days Sales in Receivables	45 days	10 days	350%
Return on Asset	0.10	0.15	-33.33%

The owner, David, has arranged a meeting with the Sales Manager, John.

David: John, tell me about your opinion from the financial report?

John: Boss, I think our company is performing good as there are increasing in all ratios except the Return on Asset.

David: Can you share with me how did you achieve such a good performance?

John: We increased our advertising and provided some very attractive price concessions to move the products. We have no choice. New models of various computer accessories are already out there, and we have to unload the inventory of old ones.

David: But how about the increase in Days Sales in Receivables?

John: As you may be aware, the company is under tremendous pressure to expand 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.

David: Your responses have not been reassuring to me.

John: Im a little bit confused. Assets are good, right? Why dont you look at our current ratio? It has improved, hasnt it? I would think that you would view that very favourably.

REQUIRED:

1. Examine the concerns and responses of John. (10 marks)

2. Examine the concerns and responses of David. (10 marks)

3. If you were David, how would you respond to Johns last comment? (5 marks)

(Total: 25 marks)