Liquidity Ratios

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.

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

Kepler Company
Comparative Income Statements
		This Year		Last Year
Sales		$ 950,000		$ 900,000
Less: Cost of goods sold		500,000		490,000
Gross margin		$ 450,000		$ 410,000
Less: Selling and administrative expenses		275,000		260,000
Operating income		$ 175,000		$ 150,000
Less: Interest expense		12,000		18,000
Income before taxes		$ 163,000		$ 132,000
Less: Income taxes		65,200		52,800
Net income		$ 97,800		$ 79,200
Less: Dividends		27,800		19,200
Net income, retained		$ 70,000		$ 60,000

When required, round your intermediate computations and answers to two decimal places. Assume that the ending balance of last year's accounts receivable and inventory is the average for last year computations. Assume 365 days per year.

Required:

1. Compute the following ratios for each year:

	This Year	Last Year
a. Current ratio
b. Quick ratio
c. Receivables turnover	days	days
d. Inventory turnover	days	days

2. CONCEPTUAL CONNECTION: Has the liquidity of Kepler improved over the past year?

Explain why industrial liquidity performance would be useful information in assessing Keplers liquidity performance.

The liquidity of Kepler has over the past year as measured by the turnover ratios and the current and quick ratios. Industrial liquidity performance would allow us to assess what is normal for the industry and thus better assess what is a reasonable liquidity level for Kepler.