Page 183 - DMGT202_COST_AND_MANAGEMENT_ACCOUNTING

Cost and Management Accounting

Notes Liquidity

Working Capital
Ford Motor Company’s working capital fl uctuated significantly in the years 1991-1995. This

phenomenon is directly attributable to the fact that Financial Services current assets and
current liabilities are not included in the total company current asset and current liability

accounts. For example, the fluctuation from 1994 ($1.4 billion) to 1995 (-$1.5 billion) of
$2.5 billion would suggest that Ford would be unable to pay liabilities during the current
period. However, examination of the Financial Services side of the business reveals that
surpluses of $13.6 billion existed in both 1994 and 1995, convincingly mitigating the fi gures
indicating negative working capital.
Current Ratio & Quick Ratio

The current ratio in the years 1991-1995 has remained stable, fluctuating between 0.9

and 1.1. The quick ratio has also remained stable, fluctuating between 0.5 and 0.6. The

larger fluctuation in the current ratio versus the quick ratio is caused by inventories being
included in the asset side of the equation. Although inventories were significantly higher in

both 1994 and 1995, current liabilities were also higher. In addition, marketable securities
decreased substantially in 1994 and 1995. These factors resulted in the stability of both the
current ratio and quick ratio.
Receivable Turnover & Average Days’ Sales Uncollected

An examination of trends in Ford Motor Company’s receivable turnover and average days’
sales uncollected ratios reveal positive indicators of Ford’s liquidity position. The receivable
turnover, a function of net sales and average accounts receivable, has nearly doubled in the
years 1993-1995 versus 1991-1992. This trend indicates an extensive increase of net sales in
relation to accounts receivable. Receivables were relatively higher in 1994 than in any other
of the five years, affecting the ratio for both 1994 and 1995. However, net sales increased

30% in 1994 and 34% in 1995 over the average net sales of 1991-1993. The average days’

sales uncollected ratio has decreased significantly over the same period, from 16.9 days in
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

Profi tability
Profi t 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
Contd...

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