Standard Industry Classification codes SIC are used for fina

Standard Industry Classification codes (SIC) are used for financial statement “benchmarks” analysis. Your company’s financial results would need to be compared to others. SICs provide the format to compare a particular company’s financial data to their respective SIC-industry averages.

Explain how you would use SIC codes to analyze a Company Xs Accounts Receivable Turnover of four times per year versus a SIC rate of eight times per year.

Solution

rarnovables turnover ratio = net sales/average receivables

Days of receivables = 365/receivables turnover ratio

Company X\'s turnover ratio of 4 times is much less than the SIC rate of 8 times. This is an indicator of lack of efficiency and control of the company. The activities of company are out of line of the industry.

Receivables turnover ratio of 4 indicates that the company gets the cash for its receivables in 91.25 days while others in the industry get their money in 45.6 days.

This means that company X\'s credit policy is very lenient which may lead to increased sales but increases the risk of default and bad debts.