Mike Sanders is considering the purchase of Kepler Company, a firm specializing in the manufacture of office supplies. To be able to assess the financial capabilities of the company, Mike has been given the company’s financial statements for the 2 most recent years.

Required:

1. Compute the following ratios for each year: (a) current ratio, (b) quick ratio, (c) accounts receivable turnover (in days), and (d) inventory turnover (in days).

2. Has the liquidity of Kepler improved over the past year? Explain why industrial liquidity performance would be useful information in assessing Kepler’s liquidity performance.

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Assets Current assets: Cash Accounts receivable, net Inventory Prepaid expenses Total current assets Property and equipment, net Total assets Kepler Company Comparative Balance Sheets Liabilities and Stockholders' Equity Current liabilities: Accounts payable Short-term notes payable Total current liabilities Long-term bonds payable, 12% Total liabilities Stockholders' equity: Common stock (100,000 shares) Retained earnings Total liabilities and stockholders' equity This Year $ 50,000 300,000 600,000 25,000 $ 975,000 125,000 $1,100,000 $ 400,000 200,000 $ 600,000 100,000 $ 700,000 200,000 200,000 $1,100,000 Last Year $ 100,000 150,000 400,000 30,000 $ 680,000 150,000 $830,000 $ 290,000 60,000 $ 350,000 150,000 $ 500,000 200,000 130,000 $830,000