Question

Marta Enterprise is a large corporation that had business activities in such areas as building, maintenance services, real-estate investment, and truck leasing and auto parts distribution. The   following selected data was obtained from the company’s comparative income statements and statements of financial position.

Income Statements Data For the Year ended
	31/12/ YEAR 2	31/12/YEAR 1
	Ksh. ‘000’	Kshs. ‘000’
Net sales	97,000	82,000
Cost of goods sold	57,500	47,500
Selling expenses	14,000	12,000
Administrative expenses	16,500	15,000
Interest expense on long-term debt	1,500	2,100
Statement of Financial Position
	31/12/ YEAR 2	31/12/YEAR 1
	Ksh. ‘000’	Ksh. ‘000’
Cash	127,000	119,500
Short-term investments	52,500	68,000
Inventories	18,000	14,000
Pre-paid expenses	79,000	65,500
Total current liabilities	3,500	5,000
Long-term debt	112,000	107,500
	15,000	21,500

At the beginning of year 2, top management implemented a firm-wide cost control program aimed at selling and administrative expenses. The company rounds all computations to one decimal place and has no cash sales.

Required:

4. Which of the preceding ratios would probably most interest a short –term creditor? Why?                                                                                                             (6marks)

Answer 1

A short term creditor would be most interested in liquidity ratios because they provide the best information on the cash flow of a company and measures its ability to pay its current liabilities or the money a company owes to its creditors.

Liquidity ratios include: Current ratio , acid - test ratio, working capital, accounts receivable turnover, Inventory turnover.