Question

Select information from Patel Sales and Services financial statements are listed below:

	2020	2019
Cash	60,100	64,200
Held-for-trading investment	74,000	50,000
Accounts receivable	117,800	102,800
Merchandise Inventory	126,000	115,500
Property, plant and equipment (net)	649,000	520,300
Accounts payable	160,000	145,400
Income taxes payable	43,500	42,000
Bonds payable (20,000 due each year)	220,000	200,000
Net sales	1,890,540	1,750,500
Cost of goods sold	1,058,540	1,006,000

Part A                                                                                                                                     

Calculate the following ratios in the table below for 2020.  Show your calculations to receive full marks).  Results should be rounded to 2 decimal places.

The 2019 results for those ratios are shown in the table below.  In the Conclusion column, indicate whether Patel has improved or deteriorated in 2020 as compared to 2019.

	2020	2019	Conclusion
Current Ratio		1.5:1
Inventory Turnover		12 times

Part B                                                                                                                                      Marks

Discuss Patel’s overall financial position in 2020 compared to 2019 using your results from above.

Answer 1

Current Ratio

It is a liquidity ratio that measures company ability to pay short term obligation are those due within one year. This ratio is used globally as way to measure the overall financial health of a company , this ratio is derived by dividing current assets to the current liabilities

Ratio between 1.5 to 3 is basically considered healthy and ratio lower than 1 indicate liquidity problem

Inventory Turnover Ratio

In accounting the inventory turnover is a measure of the number of times inventory is sold or used in a time period such as year , it is calculated by dividing the cost of good sold to the average inventory.

As higher the inventory turnover , it is better.

Part A working

Table showing Summary of Current Assets and Current Liabilities

Current Assets	Amount	Current Liabilities	Amount
Cash	$60,100	Account Payable	$160,000
Held for trading investment	$74,000	Income tax payable	$43,500
Accounts Receivable	$117,800
Merchandise Inventory	$126,000
Total Current Assets	$377,900	Total Current Liabilities	$203,500

Table showing current ratio and the inventory turnover ratio for the year 2020

Currrent Ratio = Current Asssets / Current Liabilities = $377,900 / $203,500	1.86:1
Inventory Turnover Ratio = Cost of goods sold / Average inventory = $1,058,540 / $120,750	8.77 Times

Cost of goods sold is given in the requirement but Average stock is the sum of opening merchandise inventory and the closing merchandise inventory and then divide by 2.

To obtain Average inventory which is calculated as: $120,750 ($115,500 + $126,000) / 2

Part B

COMPARISON OF TWO RATIO FOR THE YEAR 2019 AND 2020

Ratio	2020	2019	Conclusion
Currrent Ratio	1.86:1	1.5:1	As compared to 2019 , the ratio is higher and increased which shows a good sign, increasing ratio shows company's ability to pay short term obligation very quickly And also indicate investor to analyse how company maximise the current assets. A healthy ratio is considered to be 2:1
Inventory Turnover Ratio	8.77 times	12 times	As compared to 2019 , this ratio decline which is not a good sign as lower inventory turnover ratio would indicate weaker sale and decline in demand for a company's product. Company must take steps to improve their ratio and also increases demand in the market