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Pages:
4 pages/≈1100 words
Sources:
No Sources
Level:
APA
Subject:
Literature & Language
Type:
Reaction Paper
Language:
English (U.S.)
Document:
MS Word
Date:
Total cost:
$ 14.4
Topic:
Analysis of Sales Return Adjustment and Financial Impact on BBR (Reaction Paper Sample)
Instructions:
Analysis of Sales Return Adjustment and Financial Impact on BBR
BBR (Big Box Retailer) used past sales data and found they needed to underestimate their sales returns. There was a two hundred fifty million increase in estimated return inventory as a current asset. Adequate VAT net s increased liability for returns by $600m (current liability).For sales returns were too low. The adjustments needed include:
• Increase estimated return inventory by $250 million (current assets).
• Increase liability related to returns by $600 million (current liabilities).
We need to evaluate how this affects:
1. The current ratio.
2. The company’s solvency.
3. The gross margin. source..
Content:
Analysis of Sales Return Adjustment and Financial Impact on BBR
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Analysis of Sales Return Adjustment and Financial Impact on BBR
BBR (Big Box Retailer) used past sales data and found they needed to underestimate their sales returns. There was a two hundred fifty million increase in estimated return inventory as a current asset. Adequate VAT net s increased liability for returns by $600m (current liability).For sales returns were too low. The adjustments needed include:
•Increase estimated return inventory by $250 million (current assets).
•Increase liability related to returns by $600 million (current liabilities).
We need to evaluate how this affects:
1.The current ratio.
2.The company’s solvency.
3.The gross margin.
Solution Breakdown:
1. Current Ratio Calculation:
Error:
The most common mistake in calculating the current ratio is correctly adjusting current assets and liabilities. The increase in liabilities is often considered, but the increase in assets is missed, leading to an incorrect ratio.
Correct Calculation:
•Before the event:
•Current Ratio = Current Assets/Current Liabilities = 21,573/21,747 = 0.992
•After the event:
oIncrease in Current Assets = $250 million.
oIncrease in Current Liabilities = $600 million.
Updated Current Assets:
21,573+250=21,823million
Updated Current Liabilities:
21,747+600=22,347 million
New Current Ratio:
21,823/22,347≈0.976
Solution:
The correct new current ratio is 0.976.
2. Solvency Impact:
Error:
A common misconception is that solvency improves because assets have increased. However, since liabilities increased more than assets, solvency worsens.
Correct Explanation:
•Solvency is affected by the company's ability to meet long-term obligations. In this case, liabilities have increased by $600 million, while assets only increased by $250 million.
•As a result, the company's financial position regarding long-term obligations has weakened.
Solution:
Solvency has reduced because the rate of increase in liabilities is higher than that of assets.
3. Gross Margin Impact:
Error:
Some of you may argue that due to this event, the gross margin changes. Howev...
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