Partial comparative balance sheet and income statement
information for Posad Company follows.
REQUIRED : Provide a detailed comment on the change in the
company’s liquidity position, including its operating cycle and
required days of financing from 2013 to 2014.
Homework Answers
Liquidity ratios help to judge the company's ability to meet its short term obligations. Some of the commonly used liquidity ratios are quick ratio current ratio and cash ratio.. To judge the liquidity position of the company following ratios are being considered:
| 2014 | 2013 | ||
| Quick Ratios | (cash & cash equivalents+marketable securities+accounts receivable)/ current liabilities | 1.64 | 2.24 |
| Current ratio | current assets/ current liabilities | 3 | 4 |
| Cash Ratios | cash & cash equivalents/ total liabilities | 0.34 | 0.37 |
Higher the liquidity ratio the better it is . From the above ratios it can concluded that the company was in a better position in 2013 as compared to 2014
The operating cycle helps in knowing the time a business takes to purchase inventory, sell the inventory and finally collect the cash from the same . The cycle helps in determining the efficiency of a business.
Mathematically operating cycle is a sum of inventory period and accounts receivable period. Inventory period helps in assessing how fast the company is able to sell its inventory and accounts receivable period helps in assessing how fast the company is able to recover the money from sales.
| 2014 | |
| Inventory period= Average inventory/ COGS * 365 | 174 |
| Accounts receivable period=Average accounts receivable/ net credit sales* 365 | 91 |
| 265 |
As the opening balances for inventory and accounts receivable is not available for year 2013 it is difficult to calculates its operating cycle.
But speaking generally , 265 days operating cycle is a very long cycle and company should aim at reducing it
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Partial comparative balance sheet and income statement
information for Posad Company follows.
REQUIRED : Provide a...
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