Analyzing Accounts

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A)
Return on net operating assets ( RNOA = NOPAT/Average NOA) is commonly used to evaluate a companies
financial performance. If managers cannot increase NOPAT, they can still increase RNOA by reducing the
amount of net operating assets (NOA).
Listed below are three operating items that can be effectively manged to reduce operating assets, and/or
increase RNOA:
Inventories
Plant, Property, and Equipment (fixed assets)
Accounts Payable
List and explain ONE action you would take, for EACH operating item above, to increase RNOA and/or reduce
net operating assets (NOA). In your response you should have ONE action item for EACH operating item
listed.
1)
1. An action that would help reduce the net operating assets for inventory is to manage what inventory the
company has at all times in order to efficiently use and produce inventory as necessary. This, in turn, would
reduce the amount of capital being used in inventories for the company.
2. As for plant, property, and equipment (fixed assets), one action would be to sell any fixed asset that is old
and has been upgraded already. You could also sell fixed assets that are no longer in use regardless of their
age. This would remove them from the balance sheet.
3. The accounts payable balance of the company can be reduced by ensuring timely payments so that there
are no late fees added to invoices. Another thing that could be implemented is to pay all accounts payables as
“net” for possible discounts on the company’s account balances, therefore reducing the AP balance
substantially.
2)
To effectively manage inventories, the company can use a JIT inventory system. This will keep inventory levels
at a minimum, reducing the overall operating assets. The company can reduce their fixed assets by leasing
some of its PP&E rather than have the assets on their books, and they can remove any obsolete assets. This
will reduce their overall operating assets. NOA is derived by subtracting operating liabilities (accounts payable)
from the operating assets. Therefore, increasing the use of accounts payable rather than using some other
payment method will reduce NOA and increase the RNOA ratio.

 

 

 

 

 

Sample Solution

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