C251 - Accounting Capstone Task 1: Yellow Leaf Fashion Inc.Caleb Revills

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prove to be beneficial, it also can drive away potential customers, leading them to competitors that will extend them credit. In comparison to the industry average, Yellow Leaf Fashions receivable tur... nover ratio is low. However, in the context of the five stages of the product life cycle, the company sprinted into the growth stage within two years of its operations maintaining cash on hand and not suffering the typical low volume of sales industries experience within the introduction stage. The point here being that, the company has proven since its inception to manage its receivables by showing effective management in converting them into cash. However, the concerning factors that must be looked at, are the number of days the company's customer base takes to pay its debts, which is 120.9 days. Typical in retail industries is a net30 billing cycle, which would represent high delinquency and future write offs of these growing receivable balances. More importantly, it plays to the growing bad debt expenses incurred which is $115,752.00 for the year ended 2014. Yellow Leaf Fashion should also reexamine its doubtful accounts policy to ensure that four percent is indeed the conservative approach. Rising sales doesoffset the increase in bad debts and generate optimism for company profitability, but with a low receivables turnover ratio it does raise concern in regard to the collection process and should be looked at before it spirals out of control. Next, Yellow Leaf Fashions asset turnover ratio is 1.14. The asset turnover ratio is a measurement that compares the net sales to total assets, showing how well a company uses its assets to generate revenue. It is common for retail companies to maintain relatively small asset bases but have a high volume in sales as is the case for Yellow Leaf Fashion. The retail industry average for the year ended 2014 is 2.19, according to CSIMarket.com. Comparatively speaking, Yellow Leaf Fashion generating $1.14 in sales for every dollar is close to industry average. The company's growth in sales has aided in this measurement. Also, Yellow Leaf Fashions long- term assets are $207,000, which make up only 7% of all total assets. This aids in the speed involved inthe collection process because with fewer fixed assets, such as property, plant and equipment, theunderutilization of assets in efforts of generating revenue is less likely. 3. Explain what eachof the two profitability ratios calculated in part G3 indicates about the company's financial position and performance.Yellow Leaf Fashions profit margin on sales is 28.06%. The profit margin on sales ratio isa strong indicator of how a company is handling its finances overall. More specifically, the profitmargin ratio speaks to the percentage of a company's sales leftover after all business expenses are paid for. The company's high profit margin ratio is indicative of its ability to generate revenue. An increase of $1,437,800 in sales plays a key role in generating enough cash to take care of its operating expenses. More importantly, it offsets its $633,803 increase in general and administrative expenses. For two consecutive years, the company has maintained a strong 43% operating margin, so management has demonstrated a firm control of its annual expenses. Highlighting the largest spike in general and administrative expenses, the $243,550 increase in salaries and wages expense is most likely attributable to the higher commissions disbursed to topsales employees. The $71,890 increase in bad debts is the only real concern for the company, because its credit extensions have increased for the year, leading to these unpaid balances and more importantly creating growing uncertainty for future collections as well. However, with continued sales growth and low expenses overall, the company will continue to measure stronglyagainst its competitors within the industry, which serves a 22.45% average overall according to CSIMarket.com. Need the answer? 4914 tutors online. Answers in as fast as 15 minutes. [Show More]

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