Question

Pecunious Products, Inc.'s financial results for the past three years are summarized below: Year 2 Year 1 Year 3 179.2 3.5 1.12 13.16 9.1 9.9% 56% $1.50 Sales trend Current ratio Acid-test ratio Accounts receivable turnover Inventory turnover Dividend yield Dividend payout ratio Dividends paid per share 161 3.22 1.26 14.84 140 3.08 1.54 17.5 11.2 8.1% 84% $1.50 10.08 9.1% 70% $1.50 *There have been no changes in common stock outstanding over the three-year period. Your boss has asked you to review these results and then answer the following questions: a. Is it becoming easier for the company to pay its bills as they come due? (4 points) b. Are customers paying their accounts at least as fast now as they were in Year 1? (4 points) c. Is the level of inventory increasing, decreasing, or remaining constant? (4 points)

Answer 1

Answer to a. Yes it is becoming easier for the company to pay it's bills as they come due.

Reason : The best way to ensure that company pay it's bills as they come due is to ensure that they have enough assets available to repay it's debts.The acid test ratio is a indicator as to whether a company has enough short term assets to repay it's current liabilities.The acid test ratio of the company is increasing constantly in each year which shows the the availability of more assets to repay the liability of the company.

Answer to b. Yes customers are not paying their accounts at least as fast as they were in Year 1.

Reason : There is constant increase in Accounts receivable turnover inspire of decrease in sales in subsequent year which means the amount outstanding with customers is not increasing.High accounts turnover ratio indicates that company accounts receivable is efficient and company's customers are paying it's debt quickly.

Answer to c. The level of inventory is constantly decreasing.

Reason : Inventory turnover ratio shows the level of inventory corresponding to the sales of the company.Higher Inventory turnover ratio indicates low level of inventory corresponding to its sales.Since the inventory turnover ratio is increasing on subsequent year which means company has low level of inventory.