Liquidity Analysis

The information below has been extracted from the financial statements and notes of Cedar Ltd. 2013 $ 66,200 214,000 145,000 364,000 8,400 600,000 356,400 1901200 1141400 2012 $ 71,800 200,600 147,800 333,600 12,600 517,400 321,000 1805800 1065600

Cash assets Marketable securities Accounts receivable Inventories Prepaid insurance Property, plant and equipment Accounts payable Revenue sales on credit) Cost of sales

Required:
A. Calculate the following for 2013 to one decimal place: 1- Current ratio Current Ratio = Current Assets / Current Liabilities Current Ratio = $797,600 / $356,400 = 2.2 Working: Current Assets = Cash assets + Marketable securities + Accounts receivable + Inventories + Prepaid insurance Current Assets = $66,200 + $214,000 + $145,000 + $364,000 + $8,400 Current Assets = $797,600 Current Liabilities = Accounts payable = $356,400 2- Quick ratio Quick Ratio = Quick Assets / Current Liabilities Current Ratio = $425,200 / $356,400 = 1.2 Working: Quick Assets = Cash assets + Marketable securities + Accounts receivable Current Assets = $66,200 + $214,000 + $145,000 Current Assets = $425,200 Current Liabilities = Accounts payable = $356,400 3- Receivables turnover ratio Receivable Turnover Ratio = Credit Sales / Average Account Receivables Receivable Turnover Ratio = $1,901,200 / $146,400 = 13.0 times

Working: Average Account Receivables = ($145,000 + $147,800) / 2 = $146,400 4- Average collection period of accounts receivable Average collection period of account receivables = 365 / Receivable Turnover Ratio Average collection period of account receivables = 365 / 13 = 28 days 5- Inventory turnover ratio Inventory Turnover Ratio = Cost of sales / Average Inventory Receivable Turnover Ratio = $1,141,400 / $348,800 = 3.3 times Working: Average Inventory = ($364,000 + $333,600) / 2 = $348,800 6- Average period for inventory turnover Average period for inventory turnover = 365 / Inventory Turnover Ratio Average collection period of account receivables = 365 / 3.3 = 112 days B. What conclusion can you come to in relation to Cedar Ltd. Liquidity? Currently the company is having strong liquidity as current ratio in the year 2013 is 2.2 and the quick ratio is 1.2. This depicts that the company can pay its current as and when they become due from the current assets of the company. Moreover, the account receivable turnover ratio is exceptionally good and it is 13 times. Moreover, the average collection day of the account receivable is 28 days that is also depicting a good control over account receivables. The only alarming point is the slow movement in the inventory as inventory turnover is 3.3 time and average period of inventory turnover is 112 days. The management must focus on the long outstanding inventory with a view to reduce the blockage of the investment in the inventories.