Question
Based on all the ratios below, which of the two companies is most liquid? Assume that both companies have approached you seeking a six-month (short-term)
Based on all the ratios below, which of the two companies is most liquid? Assume that both companies have approached you seeking a six-month (short-term) loan in the amount of 30% of the respective companys current assets. You have but one loan to give. To which company do you grant the loan? Please discuss each ratio.
COMPANY 1 (date from 2018 and 2019)
2019 | ||
1. Current Ratio= Current Assets / Current Liabilities | =1271900 / 1247742 =1.02 | =1100433 / 1119631 =0.98 |
2. Quick Ratio= Current Assets- Inventory- Prepaid Expenses / Current Liabilities | =(1271900 - 124809 -954183 ) / 1247742 =0.155 | =(1100433 -115136- 752562) / 1119631 =020 |
3. Accounts receivable turnover =Net Credit Sales/ Average Debtors | =6643051 / 58752 =113.07 | =6084766 / 71649 =84.92 |
4. Average Days to collect= 365 / Accounts receivable turnover | =365 / 113.07= 3.22 | 365 / 84.92= 4.29 |
5. Inventory Turnover= COGS / Average Inventory | = 3868119 / 954183 =4.05 | =3559158 / 752562 =4.73 |
6. Average Inventory Period= 365 / Inventory Turnover | = 365 / 4.05= 90.12 | 365 / 4.73 = 77.16 |
COMPANY 2
A) Statement showing basic information from the above-given question:
Sr No | Particular | Feb 3, 2017 | Feb 3, 2018 | Feb 3, 2019 | Feb 3, 2020 |
1. | Total Current Assets | 1739385 | 1770532 | 1848082 | |
2. | Total Current Liabilities | 1049235 | 933535 | 930820 | |
3. | Total Inventories | 1520719 (1463561 + 57158)* | 1463561 | 1528417 | 1465007 |
4. | Cost of goods sold | 4166411 | 4199718 | 4291520 | 4235978 |
5. | Total Credit sales ( As per the information given in question total sales is credit sales ) | 6257137 | 6261477 | 6356109 | 6203520 |
6. | Accounts Receivables | 29566 (38437-8871)* | 38437 | 49853 | 46160 |
7. | Average Receivables (Yr I receivable + Yr II receivables) /2 | 34001.5 | 44145 | 48006.5 | |
8. | Average Inventory (Yr I inventory + Yr II inventory) /2 | 1492140 | 1495989 | 1496712 |
* Using cash flow statement
B) Statement showing Ratio calculation from the above-collected information from given question:
Sr No | Particular | Feb 3, 2018 | Feb 3, 2019 | Feb 3, 2020 |
1. | Working Capital = (Current Assets - Current Liabilities) From table A ( 1-2 ) | 690150 | 836997 | 917262 |
2. | Current Ratio = (Current Assets / Current Liabilities) From table A ( 1/2 ) | 1.658 | 1.896 | 1.985 |
3. | Quick Ratio = ( Current Assets - inventories)/Current Liability From table A [ (1-3)/2 ] | 0.263 | 0.259 | 0.412 |
4. | Accounts Receivable turnover Ratio = ( Net Credit sales / Average Accounts receivable ) From table A (5/7) | 184.15 | 143.98 | 129.22 |
5. | Avg Days to collect receivable Ratio = (365 / Avg Receivable turnover ratio) From table B ( 365 Days/4) | 1.98 | 2.35 | 2.82 |
6. | Inventory Turnover ratio = ( Cost of goods sold / Avg Inventory ) From table A ( 4/8) | 2.815 | 2.869 | 2.830 |
7. | Average Days to sell the inventories = (Inventory / Cost of sales)*365 days From table A (3/4)* 365 days | 127.20 | 130.00 | 126.23 |
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