M K Berry Is the Managing Director of CE Ltd

question 175

Essay

M. K. Berry is the managing director of CE Ltd. a small, family-owned company which manufactures cutlery. His company belongs to a trade association which publishes a monthly magazine. The latest issue of the magazine contains a very brief article based on the analysis of the accounting statements published by the 40 companies which manufacture this type of product. The article contains the following table: CE Ltd's latest financial statements are as follows: The country in which the company operates has no corporate income tax. No dividends were paid during the year. All sales are on account. Required:
a. Calculate each of the ratios listed in the magazine article for this year for CE, and comment briefly on CE Ltd's performance in comparison to the industrial averages.
b. Explain why it could be misleading to compare CE Ltd's ratios with those taken from the article.

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Definitions:

Allowance Method

An accounting technique that estimates and records bad debts expense from credit sales.

Bad Debt Expense

An expense account representing accounts receivable that a company does not expect to collect and writes off as a loss.

Allowance for Doubtful Accounts

A contra account that reduces the total receivables on the balance sheet to reflect the amount that is expected not to be collected.

Selling Receivables

The process of selling a company's outstanding invoices to a third party to improve cash flow and reduce risk.