Accounting for Business: Liquidity and Operational Performance, Income and Revenue Determination, Lender's Perspective

ACCOUNTING FOR
BUSINESS
STUDENT ID:
[Pick the date]

PART A
a) 1) Current Ratio – The given ratio measures liquidity (over short term) and hence the
underlying ability to fulfil the current liabilities using the current assets available. The
relevant computation is performed below.
2) Quick Ratio: The given ratio measures liquidity (over short term) and hence the underlying
ability to fulfil the current liabilities using the current assets (excluding inventory) available.
The relevant computation is performed below.
3) Accounts Receivable Turnover – The given ratio acts as a measure of operational
efficiency and highlights how quickly is the company able to collect cash from the customers
to whom sales are made on credit. The relevant computation is performed below.
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4) Inventory Turnover – The given ratio acts as a measure of operational efficiency and
highlights how quickly the company is able to sell the available inventory to the customers.
The relevant computation is performed below
b) Liquidity Performance – As highlighted in the computation above, between 2018 and
2019, there is a significant dip in the current ratio but the quick ratio has shown marginal
improvement. Based on these movements in the quick and current ratio, it can be
concluded that the performance of the company has been worse in 2019 as compared to
2018. A higher value of these ratios is preferable as it would indicate a better liquidity
position. However, the current situation also does not raise any concern since the current
assets even after excluding inventory provide sufficient coverage for currency liabilities
(Damodaran, 2015).
Operational Performance– A positive aspect that emerges when corresponding values for
2018 and 2019 are compared is that the company has shown significant improvements as
days for inventory turnover and receivables collection have both reduced in a meaningful
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