1. Al Dente owns a spaghetti pasta manufacturing firm. Al has a current ratio of 3.7 and a quick ratio of 1.05. Al wants you to go the bank with him to ask for a loan for operating capital. Al is afraid that he will not have the cash to pay his employees in two weeks. Al is unsure of how the bank will interpret these ratios. Al asks you the following questions:
a What factors ( accounts) could cause the current ratio to be so much higher than the quick ratio?
b Will the bank give Al Dente the loan? Why or why not?
c. How can Al improve his cash situation, besides the loan? List specific actions to take.
2. Bess Eaton, owner of " the Donut Whole" has an inventory Turnover ratio of 189 to 1. Bess wants to know how to improve her turnover ratio. As a donut industry accounting expert, you explain the effect of the following transactions or events on the average selling period to Bess Eaton:
a. The length of the average selling period for The Donut Whole is ?
b. Purchase of donut dough
c. Borrowing from the bank of $2,400
d. Inventory on hand
e. Expanding the donut line to add 5 new kinds of donut
f. Quantity discounts
3. Les Payne, an anesthesiologist, is experiencing significant cash flow problems, and has a major alimony payment due. His accounts receivable turnover is 4.3. Les needs your professional help to explain to him some options that will improve his accounts receivable turnover in his business. He has the following questions:
a. I do not understand this 4.3 accounts receivable turnover result. Could you tell me how many days on average it is taking clients to pay me?
b. What can I do to motivate these clients to pay me sooner? I need the cash!
c. If I borrow some c ash at the bank will it affect the ratio?
d. Does this ratio result include those customers that pay me in cash?
e. If Les offers terms of n/45, how does this turnover rate of 4.3 relate to the n/45? Explain.
4. Owen Moore, owner of a furniture store, is concerned about the payables turnover for the company. Consider the following:
Period June July August September October
Payables Turnover 6.1 7.5 8.2 9.3 11.0
a. Owen asks what this ratio means? He is under the impression that the lower the number, the better things are going. Explain to Owen what the above trend indicates?
b. Owen asks if there is another way to interpret this result, something a little easier to understand?
c. Owen asks what the implications of this result are for taking discounts for early payment. Explain what is likely to occur with regard to discounts for Owen.
d. Owen's operating cycle is 90 days. Discuss the implication of this cycle length with respect to the length of the average payment period for Owen.
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