P6-38 (30 minutes) a. Best Buy (a retailer) reports a much higher receivables turnover rate than does the manufacturer, Caterpillar. The likely reason for this is that retail sales are usually via cash, check, or credit cards (which are like cash for the retailers). Recall that the turnover ratio includes credit sales, but, because most firms do not report credit sales, we are forced to use total sales when we calculate the turnover ratio. Using total sales instead of credit sales overstates the turnover ratio. Manufacturers, on the other hand, usually sell to retailers on credit and the accounts are not collected for a much longer period of time. CAT has a finance subsidiary that provides loan and lease financing. The longer term of these receivables reduces turnover rates. Walmart, on the other hand, is primarily cash-and-carry, hence its high turnover rate for accounts receivable.

b. Dell’s relatively higher inventory turnover rate, compared with Caterpillar, most likely reflects the fact that Dell builds to order, not in anticipation of demand. That is, raw materials are not acquired until needed in the production process and components are built by sub-contractors. Both of these techniques reduce the amount of work-in-process inventories that Dell must carry. In addition, Dell does not generally inventory finished products since production commences once the order is placed by its customers. CAT, on the other hand, builds a relatively smaller number of high-cost machines that likely take a much longer period of time to manufacture. It, therefore, carries high levels of raw materials, work-in-process and finished goods inventories.

c. Caterpillar and Verizon are relatively capital intensive. Caterpillar requires significant investment in manufacturing facilities and equipment and Verizon in