Cedar Appliance Sales and Service Ltd. owns several retail and service centres in northern British Columbia. Financial

Question:

Cedar Appliance Sales and Service Ltd. owns several retail and service centres in northern British Columbia. Financial ratios for the company for the years ended December 31, 2020, and 2019, are provided below. For comparative purposes, industry averages have also been provided.

2020 1.6:1 2019 1.7:1 Ratio Current ratio Quick ratio Accounts receivable turnover Industry Average 2:1 0.75:1 0.80:1 1:

The company is in the process of opening two new retail outlets and will need to obtain a line of credit to finance receivables and inventory. To receive a competitive interest rate on its line of credit, it needs to ensure that its liquidity ratios are close to the average for the industry. In particular, the company would like to see the current ratio at 2:1. The company has hired you, an independent consultant, to suggest how it might improve its liquidity ratios.

In preparing your report, you have gathered the following additional information:

1. The company’s credit terms to its customers are net 45 days; no discounts are provided for early payment.

2. The company policy is to pay accounts payable every 45 days regardless of the credit terms. Many supplier invoices offer discounts for payments within 30 days.

3. Cedar’s policy is to keep high amounts of inventory on hand to ensure that customers will have maximum selection.

Required

Propose several steps that Cedar Appliance Sales and Service Ltd. might take to improve its liquidity. All suggestions must be ethical.

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