Comparing Working Capital Metrics

Lesson: Comparing Working Capital Metrics

In this lesson, Nick Palazzolo highlights the importance of comparing working capital metrics for audit purposes. He discusses various ratios such as return on equity, current ratio, AR turnover, cash conversion cycle, and growth rate while explaining whether it's preferable to have the ratio be higher or lower. Nick also emphasizes the significance of understanding these relationships in an audit and provides examples on how to analyze the current year and prior year balances to identify any notable differences. The lesson ends with a reminder of the importance of conducting analytical procedures related to revenue, due to its high risk and potential for overstatement, and notes that this could also relate to managers seeking performance-related bonuses.

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Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Here's a great example of what we could see for any of the exams. We could see this in relation to a sim or multiple choice questions. However, like I was mentioning, we could say, here's ABC company, here's the industry, or here's a prior year. We want to compare how are we doing? Well, understanding that a higher return on equity is better. So we see, is it better or worse? Well, the industry is doing better. Current ratio, a higher current ratio is better. Think about what's in the numerator and denominator. The AR turnover, we want that to be higher because we want to be able to turn our AR into cash much more quickly. The cash conversion cycle, we want that to be lower because with our cash conversion cycle, that is how many days we essentially are using our operations to convert those to cash. And then lastly, the growth rate. Now, a lot of these numbers were pulled from the situations and the examples we did, and you want your growth rate to be higher, just how quickly is your company growing, lastly, for most of these formulas and metrics in any of these exams that we take, we can compare how our company is doing against others, or again, industry competitors, be it in valuation, performance management, working capital, anything like that. Obviously this is sounding much more businessy than audit. However, understanding these relationships is critical for audit just as well. Now, these are just some of the ratios in this section. Make sure you know each ratio, if it's preferable or not to have it higher or lower, super important, make sure you're familiar. Lastly here, before we get to our nice summary, when an auditor is evaluating, conducting analytical procedures

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