Question

A)

Please explain how accounts receivable can impact liquidity and solvency ratios. Additionally, you may notice some companies use total receivables instead of net receivables. Discuss how this distinction might impact the calculation and liquidity analysis.

B)

Typically, there are signs to indicate a business is failing, forcing the business to claim bankruptcy, seek financial help from the courts to pay debts, or go out of business. Review the annual report for Payless Shoesource, Using your knowledge of liquidity and solvency, analyze the financial statements to determine if you could tell why the business was going to fail.

Answer 1

(A) Accounts recievables refers to the amount of money owed to the company in the course of business by it's customers.Amount of money for the goods purchased on credit falls under the category of account recievable. Accounts recievable is listed under current asset section of balance sheet.

The impact of account recievables under liquidity and solvency ratios is as follows:

1. Liquidity Ratios: Current assets and Quick assets comprise of liquidity ratios. Since both the current assets and quick assets consists of account recievables,liquidity ratios are directly affected by the amount of account recievables. ie. The increase in recievables will increaase the ratio and vice versa.

2.Solvency Ratios: Solvency ratios,namely Total asset to debt ratio and Proprietary ratio get affected by the amount of Total assets.These Total assets consist of the amount of account recievables. Therefore, any change in the amount of account recievables will directly impact the Total asset to debt ratio and inversely affect the Proprietary ratios.

In normal case scenarios, net account recievables are taken into consideration. The difference between net account recievables and gross account recievables is that in case of net account recievables, the amount of bad debts are deducted from the gross amount recievables(total recievables). Therefore,the impact of them on liquidity analysis is as follows:

In case a company uses total recievables instead of net recievables, there will be an increase in the amount of recievables,which will furthur impact the current or quick assets by furthur increasing them.This will result in increment of the liquidity ratios.

(B) In case of Payless Shoesource,the business filed for bankruptcy twice,in April 2017 and in February 2019. The main reason for such bankruptcy was a high amount of debt,which was waved in April 2017 for $435 million.Again in 2019,when the bankruptcy was filed, $470 million was waved off. Therefore,the most prominent reason which can be highlighted from the analysis of financial statements of Payless Shoesource is that a high amount of debt can be forseen in the financial reports. Furthur the downgradation of company's credit rating by Moody's was the last indicator which confirmed the fall of the company.