Question

The following table reports the operating cycle, cash conversion cycle, and current ratio for three apparel retailers all having year-ends at January 31, 2015. Aeropostale, which was originally owned by Macy’s, is a specialty retailer of casual apparel and accessories targeting 14- to 17-year olds. The GAP built its brand name on basic, casual clothing and expanded its market by opening Banana Republic and Old Navy Stores. Ross Stores operates Ross Dress for Less^® stores, which primarily target middle-income households.

	Aeropostale	GAP	Ross Stores
Days inventory held	36.8	68.7	60.5
Days accounts receivable outstanding	0.0	0.0	2.2
Days accounts payable outstanding	28.3	43.6	40.3
Operating cycle (1 + 2)	36.8	68.7	62.7
Cash conversion cycle (1 + 2 − 3)	8.5	25.1	22.4
Current ratio	1.76	1.93	1.36

All three companies follow the industry practice of including occupancy costs in cost of goods sold.

Required:

Do any of these companies appear to have a short-term liquidity problem?

How does the industry practice of including occupancy costs in cost of goods sold affect the statistics presented in the above table?

What is the most likely explanation for Ross Stores’ 2.2 days accounts receivable outstanding?

What is the most likely explanation for 0.0 days accounts receivable outstanding at Aeropostale and The GAP?

Answer 1

1. Current Ration i.e (Current Assets/ Current Liabilities) reflected the liquidity of the organizations.

Cash conversion cycle presents the time needed for the organization in between procurement of raw material and receiving the moneys from its buyer.

Since Ross store has the least current ration i.e. 1.36, we might say that it owns least liquid assets at present.

but the ratio is above 1 then we might say that the organization owns enough current assets to satisfy its current obligation. To support the same quick ratio analysis is required.

2. Occupancy Cost includes costs related to occupying a space including; rent, real estate taxes, personal property taxes, insurance on building and contents, depreciation, and amortization expenses.

if the same related to cost of goods sold included in Cost of Goods sold then more weightage would be assigned to the Days inventory held, as an additional day will be costly to the organization.

3. Ross store's 2.2 days accounts receivable outstanding is result of its practice of selling goods on credit.

4.Aerostale & the GAP having 0 day accounts receivable is result of its policy of only cash sale.