Question

Problem 8-80A
Ratio Analysis

Consider the following information taken from GER's financial statements:

	September 30 (in thousands)
	2020		2019
Current assets:
Cash and cash equivalents	$1,274		$6,450
Receivables	30,071		16,548
Inventories	31,796		14,072
Other current assets	4,818		2,620
Total current assets	$67,959		$39,690
Current liabilities:
Current portion of long-term debt	$97	$3,530
Accounts payable	23,124	11,228
Accrued compensation costs	5,606	1,929
Accrued expenses	9,108	5,054
Other current liabilities	874	777
Total current liabilities	$38,809	$22,518

Also, GER's operating cash flows were $12,829 and $14,874 in 2020 and 2019, respectively.

Required:

Round your answers to two decimal places.

1. Calculate the current ratios for 2020 and 2019.

	Current Ratio
2020
2019

2. Calculate the quick ratios for 2020 and 2019.

	Quick Ratio
2020
2019

3. Calculate the cash ratios for 2020 and 2019.

	Cash Ratio
2020
2019

4. Calculate the operating cash flow ratios for 2020 and 2019.

	Operating Cash Flow Ratio
2020
2019

5. Conceptual Connection: What are some reasons why GER's liquidity may be considered to be improving and some reasons why it may be worsening?

GER’s liquidity appears to hold constant when one looks only at the quick ratio . However, because the receivables and inventories  may not be easily converted to cash, the liquidity of GER may be worsening.

Answer 1

Solution ::

Answer of Part 1:

For 2020:

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $67,959 / $38,809
Current Ratio = 1.75:1

For 2019:

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $39,690 / $22,518
Current Ratio = 1.76:1

Answer of Part 2:

For 2020:

Quick Ratio = (Current Assets – Inventory) / Current Liabilities
Quick Ratio = ($67,959 - $31,796) / $38,809
Quick Ratio = $36,163 / $38,809
Quick Ratio = 0.93:1

For 2019:

Quick Ratio = (Current Assets – Inventory) / Current Liabilities
Quick Ratio = ($39,690 - $14,072) / $22,518
Quick Ratio = $25,618 / $22,518
Quick Ratio = 1.14:1

Answer of Part 3:

For 2020:

Cash Ratio = Cash / Current Liabilities
Cash Ratio = $1,274 / $38,809
Cash Ratio = 0.03

For 2019:

Cash Ratio = Cash / Current Liabilities
Cash Ratio = $6,450 / $22,518
Cash Ratio = 0.29

Answer of Part 4:

For 2020:

Operating Cash Flow Ratio = Operating Cash Flow / Current Liabilities
Operating Cash Flow Ratio = $13,583 / $38,809
Operating Cash Flow Ratio = 0.35

For 2019:

Operating Cash Flow Ratio = Operating Cash Flow / Current Liabilities
Operating Cash Flow Ratio = $15,312 / $22,518
Operating Cash Flow Ratio = 0.68