MBA FPX 5010 Assessment 3 Performance Evaluation – Ace Company MBA-FPX5010 Accounting Methods for Leaders Ace Company Performance Evaluation Executive Summary Ace Company has applied for a $3 million loan, to be repaid over 10 years, to finance the purchase of production equipment and related design software.

MBA FPX 5010 Assessment 3 Performance Evaluation – Ace Company

MBA-FPX5010 Accounting Methods for Leaders

Ace Company Performance Evaluation

Executive Summary

Ace Company has applied for a $3 million loan, to be repaid over 10 years, to finance the purchase of production equipment and related design software. This evaluation focuses on Ace Company’s accounts receivable collections, inventory turnover, and short- and long-term creditworthiness to support a decision on whether to approve or deny the loan request.

Accounts Receivable Collections

Accounts receivable (AR) represent outstanding payments owed to a company for goods or services delivered that have not yet been paid by customers but are due within a specific period after sale (Marshall, 2020). Ace Company’s AR data from 2015, 2016, and 2017 shows a gradual increase in accounts receivable: from $3.8 million in 2015 to $3.9 million in 2016, and further to $4 million in 2017. The company’s accounts receivable turnover was 4.68 times in 2016 and 5.06 times in 2017. This improved turnover resulted in a reduced average payment period, from 78 days in 2016 to 72 days in 2017, signaling an enhancement in AR practices. The cash receipts also increased significantly, from $1.8 million in 2016 to $2.547 million in 2017. As Ace Company continues to increase sales and customers pay their debts more promptly, the company is more likely to meet its financial obligations on time.

Inventory Turnover

The inventory turnover ratio reflects how frequently a company sells and replaces its inventory within a given period (Fernando, 2022). A low turnover ratio can suggest weak sales or excessive inventory, while a high ratio may indicate robust sales or insufficient inventory levels. Ace Company uses the first in, first out (FIFO) inventory method, where the earliest inventory costs are the first to be transferred to the cost of goods sold, promoting more efficient inventory processing (Marshall, 2020). Inventory levels increased from $4.8 million in 2015 to $5 million in 2016, and further to $6 million in 2017, aligning with the company’s rising sales. The industry average inventory turnover is ten times per year (Assessment 3, n.d.), but Ace Company’s ratios were 1.94 times in 2016 and 1.82 times in 2017, both below the industry benchmark and worsening. Consequently, the average number of days inventory remained on hand increased from 188 days in 2016 to 200 days in 2017 (Fernando, 2022). The increase in inventory suggests the company is maintaining higher stock levels in anticipation of future sales growth.

Short-term and Long-term Credit Worthiness

Creditworthiness measures the likelihood of a company defaulting on its debts and influences credit approval decisions (Dhir, 2021). This evaluation of Ace Company’s creditworthiness considers financial statements, current ratio, times interest earned, and total debt-to-equity ratio. A current ratio of 2.0 is generally viewed as a good liquidity indicator, with higher ratios being preferable (Marshall, 2020). Ace Company’s current ratio was 1.53 in 2016 and improved to 1.79 in 2017, still below the 2.0 benchmark but showing increased liquidity. The debt-to-equity ratio, indicating a company’s ability to repay its debts, improved from 3.78 in 2016 to 2.49 in 2017. The times interest earned (TIE) ratio, which assesses the company’s capacity to pay interest on its debts, rose from 8 times in 2016 to 10.2 times in 2017 (Chen, 2022). This improvement suggests Ace Company retains sufficient cash to reinvest in the business after meeting its debt obligations.

Recommendation

Based on the analysis of Ace Company’s financial data from 2015 to 2017, it is recommended to approve the $3 million loan with a repayment term of ten years. Ace Company has shown consistent growth in sales and a reduction in liabilities over the evaluated period. Although the low inventory turnover ratio is a concern, the increase in sales suggests that the company is building inventory to meet projected sales growth in the coming year.

References

Ace Company data. Capella.edu. (n.d.). Retrieved August 10, 2022, from https://courserooma.capella.edu/bbcswebdav/institution/MBA-FPX/MBAFPX5010/191000/Course_Files/cf_ace_company_data.pdf

Assessment 3 Instructions: Performance Evaluation. Capella.edu. (n.d.). Retrieved August 8, 2022, from https://courserooma.capella.edu/webapps/blackboard/content/listContent.jsp?course_id=_374078_1&content_id=_11453020_1

Chen, J.