Page 136 - DMGT403_ACCOUNTING_FOR_MANAGERS

Unit 6: Financial Statements: Analysis and Interpretation

Notes

Case Study Evaluation of Ford Motors Company

he success of Ford Motor Company, as well as other corporations, can be measured
by analyzing the two most important goals of management, maintaining adequate
Tliquidity and achieving satisfactory profitability. Liquidity can be defined as having
enough money on hand to pay bills when they are due and to take care of unexpected
needs for cash, while profitability refers to the ability of business to earn a satisfactory
income. To enable investors and creditors to analyze these goals, Ford Motor Company
distributes annual financial statements. With these financial statements, liquidity of Ford
Motor Company is measured by analyzing factors such as working capitol, current ratio,
quick ratio, receivable turnover, average days’ sales uncollected, inventory turnover and
average days’ inventory on hand; whereas profitability analyzes the profit margin, asset
turnover, return on assets, debt to equity, and return on equity factors.

Liquidity
Working Capital
Ford Motor Company’s working capital fluctuated 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 figures 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.

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