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 Last This Year Year Assets Current assets: Cash Accounts receivable et Inventory Prepaid expenses Total current assets Property and went net $ 50,000 300,000 600,000 25,000 $ 975,000 125,000 $1,100,000 $100,000 150,000 400,000 30,000 $680,000 150,000 $830,000 Total assets Liabilities and Stockholders' Equity Current abilities Accounts payable Short term neles payable Total current liabilities Long-term bonds payable, 12% Total liabilities Stockholders' equity stock 100.000 shares) $ 400,000 200,000 $ 600,000 100,000 $ 700,000 $290,000 60,000 $350,000 150,000 $500,000 200,000 200,000 Stockholders' equity: Common stock (100.000 shares) 200,000 200,000 $1,100,000 200,000 130,000 Recamned earnings Total liabilities and stockholders' equity $830,000 Kepler Company Comparative Income Statements This Year Last Year Sales $ 950,000 500,000 $ 900,000 Less: Cost of goods sold 490,000 Gros $ $ 410,000 Less: Selling and administrative expenses 450,000 275,000 Operating in $ 175,000 Less: Interest expense 12,000 Income before $ 163,000 260,000 $ 150,000 18,000 $ 132,000 52.800 $ 79,200 19,200 Less: Income taxes Net income 65,200 $ 97,800 27,800 Lass: Dividends $70,000 $ 60,000 when required, round your intermediate computations and answers to two decinal places. Assume that the coding balance of last year's accounts receivable and Inventory is the average for last year computations. Assume 365 days per year When required, round your intermediate computations and answers to two decimal places. Assume that the ending balance or tast 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 0.71 2. Current ratio 1.63 1.94 . Quick ratio 0.58 c. Receivables turnover 4.22 x days 6 x days d. Inventory turnover 1 X days 1.23 x days 2. CONCEPTUAL CONNECTION: Has the guidity of Kepler improved over the past year? No Explain why Industrial liquidity performance would be useful information in assessing Kepler's liquidity performance The liquidity of Kepler has declined 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. Feedback 1. Current Ratio - Current Assets/Current Liabilities Quick Ratio Cash + Marketable Securities + Accounts Receivable/Current Liabilities Rectivables Turnover Net Sales/Average Receivables Receivables Turnover (Days) - 365 days/Receivables Turnover Inventory Turnover - Cost of Goods Sold/Average Inventory Inventory Turnover (Days) - 365 days/Inventory Turnover 2. Consider what the ratios show and what is measured. Industry performance needs to be considered
