Question

3) If you were preparing comparative balance sheets as of April 30, 2020 and April 2019 for a small, local retailer, which specific balance sheet accounts would you expect to see changes in?  Identify which of these accounts you would anticipate to increase or decrease.  Which of the 3 categories of financial ratios (liquidity, solvency, profitability), would be affected by these changes in the Balance Sheet accounts?  Indicate whether the category or categories would improve or deteriorate identifying which ratios within each of the categories identified would be most affected.    

Answer 1

1. I would expect to see changes in the accounts receivable, accounts payable, cash and cash equivalents, inventory, short term loans and short term assets.

2. I would anticipate the see a decrease in accounts receivable and accounts payable both as the company would have been paid back and would also have discharged its liabilities in one year. Since cash and cash equivalents depend on cash inflow and outflow it would depend on whether accounts receivable has decreased more or accounts payable.

3. The ratios which will be affected most are liquidity and profitability ratio. The current ratio( Current assets/ Current liability) will increase if there is an increase in account receivable and cash equivalents and decrease in short term liabilities.

If the inventory decreases and the sales are high, the stock turnover ratio ( inventory/ total sales) will decrease which is a good profitabilty and liquidity indicator ratio.