Financial Management

Question 1

Inventory Turnover

Formulae = Sales / Average Inventory

Year 2011Year 2012                                

Sales = RM 23,368,482        Sales = RM 135,386,450

Inventory = RM 7,073,700                          Inventory = RM 6,881,038

Inventory Turnover for 2011 = RM 23,368,482 / RM7,073,700 = 3.30X

Inventory Turnover for 2012 = RM135,386,450 / RM6,881,038 = 19.68X

        Inventory turnover is a ratio that shows how many times a corporation’s inventory is sold and replaced over a period of time. A low turnover implies poor sales and therefore, excess inventory. A high ratio implies either strong sales or ineffective buying.

        In year 2011, the sales of PFCE corporation is RM 23,368,482. While the inventory of the corporation in year 2011 is RM 7,073,700. In year 2012, the sales of the PFCE corporation is RM 135,386,450. The inventory of this corporation in year 2012 is RM 6,881,038. PFCE turns its inventory over 3.30 times in year 2011, so on average, it is carrying its inventory for 111 days (365/3.30 times in year 2011). In year 2012, PFCE corporation turns it inventory over 19.68 times, so on average, it is carrying its inventory for 19 days (365/19.68 times in year 2012).

        To improve the inventory turnover of PFCE Corporation, the corporation can increase the demand for the product line by working with the marketing team of the corporation. The corporation should focus on doing more advertisements to large population locations of the targeted market. The corporation may also offer a sales promotion in order to increase the amount of inventory that leaves the warehouse in a given period of time.

Besides that, PFCE Corporation can also set a better overall price for the products to increase demand, which can boost the sales and inventory turnover. Establishing a temporary discount or set a permanent lower price for slow-selling merchandise can also help to improve the inventory turnover of the corporation.

        Lastly, PFCE corporation should focus on producing only the products that are selling consistently. When a few products take very long time to sell out, while other products are selling fast, the slow mover will drag down the corporation’s overall inventory rate.

Return On Assets

Formulae = Net income / Total assets

Year 2011                                                Year 2012

Net Income = - RM2,085,684                        Net Income = RM1,339,605

Total Assets = RM55,345,187                        Total Assets = RM93,496,222