Question

ACCY 306 Liquidity Analysis

For parts I-VI, reference the ratios below:

	Margaret Manufacturing				Home Improvement Industry
	2018	2017	2016		2018	2017	2016
Current Ratio	1.2	1.3	1.5		1.0	1.2	1.2
Accounts Rec. Turnover	13.0	12.5	12.0		11.0	12.0	12.0
# Days’ Sales in Receivables	28.1	29.5	30.4		33.2	30.4	30.4
Inventory Turnover	7.2	7.9	9.2		9.9	9.8	9.8
# Days’ Sales in Inventory	50.7	46.2	39.7		36.9	37.2	37.2

_____I).  Margaret’s current ratio (liquidity) is:

1. Stronger over time
2. Getting weaker over time
3. Higher than its industry
4. Both a and c above
5. Both b and c above

_____II).  Assume the quick ratiofor Margaret is 0.5.  When comparing the data to Margaret’s current ratio noted above, the following conclusions may be made, except:

1. The company has most of its current assets in inventory
2. The company has the ability to meet its short-term obligations
3. The company may have difficulty paying short-term obligations if they all need to be paid immediately
4. The company may use cash management strategies to negotiate credit terms with suppliers and take a longer period of time to pay
5. All of the above could be true

_____III). Margaret’s accounts receivable turnover performance is:

1. Improving over time
2. Getting worse over time  
3. Better than its industry
4. a and c above are correct
5. None of the above are correct

_____IV). Margaret’s # Days’ Sales in Receivables are noted in the table above. If credit terms are 30 days, which of the following interpretations is correct?  

1. Collection performance improved, and credit terms are being met
2. Collection performance deteriorated and credit terms are not being met  
3. Collection performance improved but credit terms are not being met
4. Collection performance deteriorated, but credit terms are being met
5. None of the above are correct

_____V). Which of the following describe(s) Margaret’s inventory situation?

1. Inventory is turning faster over time
2. Margaret is “closing the gap” between its inventory turns and its industry results. It is becoming more efficient
3. Inventory is turning more slowly over time and is becoming less efficient
4. Margaret continues to turn its inventory more slowly than its industry and is getting worse
5. Both c and d are correct.

_____VI). Based on Margaret’s information in the table: Which of the following describe(s) the relationship between inventory turnover and days’ sales in inventory?

1. Margaret is turning its inventory more slowly over time, which means inventory is on hand an increasing number of days
2. Turnover represents the average number of times per year is converted to a sale and days’ sales represents a daily average   
3. Both ratios indicate Margaret is selling its inventory more slowly over time and is becoming less efficient
4. When turnover goes down: inventory selling more slowly; and when Days’ sales in inventory goes up: more inventory is on hand
5. All of the above are correct statements

Answer 1

ANSWERS: I-IV

I). e

Current ratio of Margaret's decreasing year by year. It indicates that Firm's ability to pay-off it's current liability is decreasing. However while compared to industry standards, Margaret's current ratio is Higher every year.

II). b

As assumed if Quick ratio is 0.5, firm can't pay it's current liabilities fully. Hence option "b" is exception and remaining all are correct.

III). d

A high Days' Sales in Receivables shows that a company is selling its product to customers on credit and taking longer to collect money. This may lead to cash flow problems because of the long duration between the time of a sale and the time the company receives payment.

IV). c

Days' Sales in Receivables decreasing year by year, it indicates that collection performance is improved and while compared to 30 days industry standards credit terms are being met in the years 2017 and 2018. But unable to met the credit terms in the year 2016.