Ark Corporation reports the following: Ark is becoming less liquid relative to i

Question

Ark Corporation reports the following:

Ark is becoming less liquid relative to its peer group

Ark has about the same liquidity as its peer group and both are improving

Ark is improving its liquidity relative to its peer group

Ark is becoming less liquid, but is still slightly more liquid than its peers

Exlection's average collection period has been increasing over the past several years. This will have what effects on the company's current ratio, quick ratio and statement of cash flows, respectively?

Increase, increase, increase cash flow from operating activities

Increase, increase, decrease cash flow from operating activities

Decrease, decrease, increase cash flows from operating activities

Decrease, decrease, decrease cash flows from operating activities

Tramson Corp has experienced steady increases in its inventory turns over the past several years. Indicate the impact of this on the company's current ratio, quick ratio, and statement of cash flows, respectively.

Decrease, no change, increase in cash flow from operating activities

Decrease, decrease, increase in cash flow from operating activities

Increase, increase, decrease in cash flow from operating activities

Increase, no change, decrease in cash flow from operating activities

A company reports the following financial information: Inventory $218; Accounts Receivable $287; Cash $100; Prepaid expenses $410; credit sales $2,147. How long does it take to collect its credit sales?

Dana reports Inventory of $2,868,392, Cash of $1,212,943, COGS of $8,055,409, and Accounts Receivable of $2,386,741. Its benchmark peer group turns its inventory 8.3 times a year. What would Dana's new inventory level be if it experienced the same number of turns as its peer group?

Current ratio 2012 2013 2014 Ark Corp. 2.2 2.0 1.7 Industry Norm 2.3 1.9 1.5 Which of the following statements is true?

Explanation / Answer

1.

Option D

Current ratio is the ratio of current asset to current liabilities. Higher the current ratio higher is the liquidity of the company.

As can be seen from the table that Ark current ratio is falling from 2.2 in 2012 to 1.7 in 2014 . However in the same period the current ratio of industry/peer group is also falling. Also each point in time Ark group current ratio is more than the industry/peer group current ratio.

Thus Ark is becoming less liquid, but is still slightly more liquid than its peers

2.

Option B

Collection period = 365*Account receivables/Sales revenue

Higher the collection period means higher account receivables. Thus increasing collection period means increasing account receivables.

Current ratio and quick ratio both is directly proportional to account receivables, so increase in account receivables will increase the both current ratio and quick ratio

Also higher the collection period means lower Sales revenue. Thus increasing collection period means decreasing sales revenue. Decreasing sales revenue will negatively impact the cash flow from operating activities. Thus there will be decrease in cash flow from operating activities.

3.

Option D

Inventory turnover =Cost of Goods Sold/Average inventory

Higher the Inventory turnover means lower Average inventory. Thus increasing Inventory turnover means decreasing average inventory.

Current ratio directly proportional to Average inventory, so increase in increasing Inventory will increase the current ratio .

Quick ratio formula do not have inventory in its formula so no change in quick ratio with change in average inventory

Also higher Inventory turnover means higher cost of goods sold. Higher cost of goods sold will negatively impact the cash flow from operating activities. Thus there will be decrease in cash flow from operating activities.

4.

Collection period = 365*Account receivables/Sales revenue

Collection period = 365*287/2147=48.79134 days

5.

Inventory turnover=Cost of Goods Sold/Average inventory

8.3=8055409/ Average inventory

Average inventory=8055409/8.3=970531.2

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