The Solution
ZERO INVENTORIES: Typically industries that provide a service.
• Advertising Agency: E
o High receivable collection in days is indicative of advertising consulting firms i.e. projects are worked on and work is billed only after the work has been completed. In this case, ad campaigns are produced and run after which advertising firms then charge for services rendered. (CR)
o A large portion of their liabilities is devoted to accounts payable simply due to pending payments to various media outlets they utilize to run ad campaigns on behalf of their clients. (CR)
o Considering collection days, the largest proportion of their asset needs to be their account receivables as the agency allows it to grow and then charges back the customer.
o In addition very little asset is required in terms of plant and equipment as much of the consulting is rendered through representatives traveling on site.
• Airline: M
o The airline industry is expected to have the lowest profit margin of the service industries in this group because the fixed costs are so low and the variable costs are so high. The classic example is a plane reaches its destination at less than full capacity while incurring the same costs to run the plane if it were full. (CR)
o Of the industries in this group, airline is the industry to spend a significant portion of their assets on plant and equipment through capital leases on their planes and ground equipment.
o Finally a less than 1 asset to liabilities ratio is consistent of the airline industry and the continual strive for airlines to avoid bankruptcy due to an inability to cover their costs.
• Commercial Bank: N
o Very high receivable collection period indicates potential long term receivable such ...