Page 43 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes 1991 to 9.7 days in 1995. The substantial decrease in average days’ sales uncollected ratio
coupled with the near doubling of the receivable turnover ratio is a reflection of Ford’s
strong sales and effective credit policies in years 1993-1995.
Inventory Turnover & Average Days’ Inventory on Hand
An examination of trends in the inventory turnover and average days’ inventory on hand
ratios also reveal positive indicators of Ford’s liquidity position. Inventory turnover, a
function of cost of goods sold and inventories, has remained stable between 14.0 and 16.0
times from 1992-1995. The average ratio over these four years (15.1 times) is 40% higher than
that of 1991. The average days’ inventory on hand, a derivative of the inventory turnover,
has conversely decreased to stable level fluctuating between 23.5 and 26.0 days in the years
1992-1995. The operating cycle of Ford Motor Company has decreased significantly as the
table below indicates.
1991 1992 1993 1994 1995
Days: 50.8 29.0 33.8 31.1 34.3
Profitability

Profit Margin
Profit margin, which is net income divided by net sales, is a measure of how many dollars
of net income is produced by each dollar of sales. Ford Motor Company had a substantial
4 year rise in profit margin. Using horizontal analysis, the profit margin increased 98%
from 1991 to 1992, 566% from 1992 to 1993 and then 79% from 1993 to 1994. Although the
profit margin from 1994 to 1995 decreased 26%, that is more than acceptable when you look
at the substantial increases in the past few years. In the first year, Ford had a profit margin
of -3.1%. That means for every dollar of sales, Ford lost $3.10. This is obviously not a good
position to be in. During 1991 and then carried over into 1992, it cost Ford more money to
make sales than it did when it recorded the income for those sales. They realized at this
time it was important for them to keep things such as selling and administrative expenses
lower, as well as the cost of sales, which included their production, manufacturing, and
warehousing costs. By following a plan more complex than I can describe here, Ford
steadily increased it’s sales while it lowered it’s expenses and it’s cost of sales. This directly
increased Ford’s profit margin at a substantial rate within the next three years.
Asset Turnover
Asset turnover involves Ford’s net sales divided by their average total assets. This ratio
demonstrates the efficiency of assets used in producing sales. A company like Ford Motor
Company has an enormous amount of assets. Computers to heavy equipment to buildings.
All of those assets, plus many more, are all taken into consideration when figuring asset
turnover. For example, Ford would like to know that if it decides to purchase 20 new
computer-aided engineering stations for a cost of about $2,400,000, they would like to see a
higher asset turnover to give them the proof that the investment is being used at maximum
efficiency. Ford’s asset turnover steadily increased in incremental amounts between the
years of 1991-1995, but on average it was about .43 for the entire 5 year period. Using trend
analysis to understand this ratio would give you a pretty good idea that the asset turnover
of Ford Motor Company is stable. Trend analysis would give you an index number for
1992 of 100, while the index number for 1995 would be 112. These index numbers would
result in a slightly positive but relatively straight line across the page. As a prospective
investor this would probably cause you to investigate more deeply as to why Ford can’t
more efficiently use their assets to produce sales. As a current stockholder, this trend
over the past five years may give you some comfort because of the incremental increases
(at least it isn’t going down).
Contd…

38 LOVELY PROFESSIONAL UNIVERSITY