Accounting

1 - Briefly explain the concept behind inventory turnover and how management uses it to measure their performance in managing inventory/cash.  Explain how the when measuring inventory across different companies what area of caution need to be considered when making this comparison.

Secondly, explain why inventory as an item of working capital is only an estimate of the real cash flow that will be derived from inventory in the normal operating cycle.

Third, define the operating cycle from a cash management perspective, ie how do we measure “cash to cash” from inventory.  Hint days in inventory is only one piece of this cycle

2 - In 2010 The Easy Problem Company had net income of $450,000 income tax of $80,000 and interest expense of $50,000.

a.             Explain how Financial Leverage can be used to the advantage of a business, but also how it can work to it’s disadvantage. IE what are the circumstances for each scenario

b.             Compute the degree of Financial Leverage if

• Net income before interest and taxes increases by 10%N
• Net income before interest and taxes declines by 50%

All off off the base noted above