Park Avenue Tire Company has been operating in Winnipeg for more than 30 years and has a very loyal customer base. The company sells and installs tires and the owners pride themselves on the excellent business relationships they have developed with both their customers and suppliers. The company often sells tires on credit, allowing customers to pay their balances within 30 days. Collection of accounts receivable has never been a problem, with most people paying their balances within 60 days. Park Avenue purchases tires from most of the large national brands and, due to the nature of the business, generally maintains a fairly large inventory. It is essential that the company have the necessary tires on hand to meet customer needs due to increased competition from large retailers such as Canadian Tire and Walmart.

The company has always had sufficient cash to pay its suppliers immediately and take advantage of cash discounts. However, this month, for the first time ever, Park Avenue does not have sufficient cash in the bank to meet its supplier payments. Chris Park, son of the original owner, Ernest Park, is currently operating the business and is very concerned about the company’s inability to maintain what he feels are adequate levels of cash.

Your firm has been the accountants for Park Avenue Tire Company for the past 20 years. Chris has approached the firm expressing his concerns and asking for advice on how to solve the cash flow problems. As part of your analysis, you review the company’s financial statements for the past three years. Excerpts from the financial statements are presented below.

During 2020, credit sales and cost of goods sold were $160,000 and $97,000, respectively. The 2019 and 2018 credit sales were $175,000 and $177,000, and the cost of goods sold for the same periods were $93,000 and $95,000, respectively. The accounts receivable and inventory balances at the end of 2017 were $8,000 and $99,000, respectively.

Required

Prepare a report for Chris Park detailing options that he can take to alleviate the company’s cash problems. Remember that you are to present options, not recommendations. As a basis for the report, you should calculate and comment on the following ratios:

a. Current ratio

b. Quick ratio

c. Receivables turnover ratio and average collection period

d. Inventory turnover ratio and days in inventory

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Dec. 31, 2020 Dec. 31, 2019 Dec. 31, 2018 Current assets $ 10,000 $ 31,500 $ 35,000 Cash Accounts receivable 15,000 12,000 9,000 169,000 Inventory 122,000 116,000 8,000 Prepaid expenses 6,000 6,500 Total current assets $200,000 $177,000 $163,000 Current liabilities $ 62,000 $ 47,000 Accounts payable 33,000 Salaries payable 4,200 5,850 3,775 Income tax payable 1,200 1,150 1,950 $ 67,400 $ 54,000 $ 38,725 Total current liabilities