Question

Х Instructions Notes Paragraph question 4 (8 marks) х The selected ratios calculated for Omega Ltd over 2 years are: 2020 2019 1.9 to 1 2.4 to 1 0.9 to 1 23.5 times a. Current ratio.... b. Quick asset ratio.... c. Accounts receivable turnover........... Days in accounts receivable d. Inventory turnover Average sale period.. 0.7 to 1 19.4 times 18.8 days 6.5 times 56.2 days 15.5 days 8.5 times 42.9 days Required: 1. Without showing how the ratios are calculated, briefly state what each of the four (4) ratios indicates: a. Current ratio Quick ratio Accounts receivable turnover and days in receivables d. Inventory turnover and days in inventory (3 marks) C 2 Comment on whether the company position, with respect to each of the 4 ratios is acceptable and b. how it has changed and outline what could have caused the changes. a. (5 marks Question 5 18 marks) Pikachu to manufacture and to the cotout one of its to the foremor balls

Answer 1

1) A) Current ratio indicates the company's ability to pay it's short term obligations within one year. From the given current ratios , it had been depicted that company's ability to pay it's short term obligations within one year decreased.

B) Quick ratio specks about instant liquidity of the company. It measures amount of available liquid assets in against of amount of current liabilities. As per the given data instant liability paying capacity of company has reduced.

C) Accounts receivable turn over ratio says how well a company extending credits and collecting debts from the markets. In case of given example , in the current year efficiency of extending credits and collection of debts ha fallen. Due to which average collection periods in days increased.

D) Inventory turn over ratio depicts number of time inventory used or sold in a given point of time ( one year). It shows movement of inventory and blockage of working capital in the form of inventory and the time duration of blockage. In the given example inventory turn over ratio has been decreased due to slower movement of inventory which also increases the days in inventory. It shows poor operational performance.

2) A) Current ratio of the company is marginally  not acceptable in current year (2020) because it is slightly lower than the standard current ratio, which is 2:1

B) Quick ratio of the company is not acceptable in current assets well as in previous year. Because in both the year it was lower than standard quick ratio, which is 1:1

C) Standard accounts receivable turn over ratio varies according to the industries.Like in retail ( 95.46) , consumer durable ( 12.42), energy ( 10.14), transportation ( 9.75) etc. Nothing mentioned in the question regarding the nature of the company. But still current year account receivables turnover ratio decreased in respect of previous year, so it doesn't acceptable for the company.

D)