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1. A retailer has accounts receivable of $70,000, total current liabilities of $440,000, and $50,000 in cash. What is the quick ratio?

2. Assuming that the retailer in problem 1 has total inventory on hand of $120,000, what is the current ratio?

3. A clothing store has accounts receivable totaling $50,000, accounts payable totaling $45,000, and net sales of $50,000. What is the collection period?

4. Assuming that the retailer in problem 3 has accounts receivable of $15,000 and net sales of $30,000, what is the new collection period?

5. A firm has total assets of $500,000, total liabilities of $350,000, and annual net sales of $1,000,000. What is the assets-to-net-sales ratio?

Paper For Above instruction

The financial analysis of retail and service businesses often involves examining liquidity ratios and efficiency metrics to evaluate their financial health and operational performance. The problems posed above encompass key ratios such as the quick ratio, current ratio, collection period, and assets-to-sales ratio, which are crucial in assessing liquidity, operational efficiency, and overall financial stability of a business.

Starting with the quick ratio, also known as the acid-test ratio, it measures a company's ability to meet its short-term obligations with its most liquid assets. It excludes inventories from current assets because inventories are less liquid. Using the data provided—accounts receivable of $70,000, cash of $50,000, and current liabilities of $440,000—the quick ratio is calculated as (accounts receivable + cash) ÷ current liabilities. This ratio indicates whether the company has enough liquid assets to cover immediate liabilities, which is critical for understanding its short-term financial resilience (Brigham & Ehrhardt, 2016).

Next, the current ratio assesses overall liquidity by comparing total current assets to current liabilities, including inventories. In the scenario where the retailer has inventory of $120,000, total current assets are the sum of accounts receivable, cash, and inventory, which total to $70,000 + $50,000 + $120,000 = $240,000. Dividing this by current liabilities of $440,000 yields a current ratio of approximately 0.545. This indicates the company's ability to cover its short-term obligations when considering all current assets, including less liquid inventories (Palepu & Healy, 2018).

The collection period measures how long it takes for a company to collect its accounts receivable. It is calculated as (accounts receivable / net sales) × 365 days. For the clothing store with receivables of $50,000 and sales of $50,000, the collection period is (50,000 / 50,000) × 365 = 365 days, suggesting it takes about a year to collect receivables. When receivables decrease to $15,000 and net sales decrease to $30,000, the new collection period becomes (15,000 / 30,000) × 365 ≈ 182.5 days, indicating an improvement in receivables collection efficiency (Gibson, 2013).

The assets-to-net-sales ratio evaluates how effectively the firm utilizes its assets to generate sales. It is calculated as (total assets / net sales) × 100%. With total assets of $500,000 and net sales of $1,000,000, this ratio is (500,000 / 1,000,000) × 100% = 50%. A lower ratio suggests more efficient asset utilization in generating sales, while a higher ratio may denote excess assets or inefficiencies, guiding management in strategic asset management decisions (Ross, Westerfield, & Jaffe, 2016).

In conclusion, analyzing these ratios provides valuable insights into the liquidity position, efficiency, and overall financial health of a retail or service business. Managers and investors rely on such metrics to make informed decisions, allocate resources effectively, and develop strategies for improving operational performance and financial stability.

References

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