Scenario 8-2. Denny's Diner is undergoing an analysis of its current financial statements. Denny is interested in seeing how his business compares to the industry. In order to make this comparison, Denny has developed the following ratios. He has come to you for an interpretation of his numbers.
$$\begin{array} { l l l l }
&\text { Denny's Diner } & \text { Industry } & \
\text { Current Ratio }& 1.51 & 1.62 \
\text { Average Collection Period } & 2.50 & 5.00 \
\text { Inventory Turnover } & 80 & 75 \
\text { Debt Ratio } &43 \% & 52 \% \
\text { Net Profit Margin } & 10.2 & 8.3
\end{array}$$
-In Scenario 8-2, after analyzing the average collection period ratio, you concluded that ______.
A) Denny has a problem since his number is so low
B) Denny may have overly restrictive credit policies
C) Denny has many uncollected accounts receivable
D) Denny's cash flow will soon be affected since his accounts receivables are not being paid.

Question

Scenario 8-2. Denny's Diner is undergoing an analysis of its current financial statements. Denny is interested in seeing how his business compares to the industry. In order to make this comparison, Denny has developed the following ratios. He has come to you for an interpretation of his numbers.
$$\begin{array} { l l l l } 
&\text { Denny's Diner } & \text { Industry } & \
\text { Current Ratio }& 1.51 & 1.62 \
\text { Average Collection Period } & 2.50 & 5.00 \
\text { Inventory Turnover } & 80 & 75  \
\text { Debt Ratio } &43 \% & 52 \%  \
\text { Net Profit Margin } & 10.2 & 8.3 
\end{array}$$
-In Scenario 8-2, after analyzing the average collection period ratio, you concluded that ______.
A) Denny has a problem since his number is so low
B) Denny may have overly restrictive credit policies
C) Denny has many uncollected accounts receivable
D) Denny's cash flow will soon be affected since his accounts receivables are not being paid.

Quizplus · Accepted Answer

Denny's average collection period is significantly lower than the industry average (2.5 days vs. 5 days), suggesting that he may have overly restrictive credit policies that lead to faster collection of receivables.

Scenario 8-2 -In Scenario 8-2, After Analyzing the Average Collection Period Ratio