Answer to Question #286575 in Accounting for Suks

Question

The following data has been extracted from the business information report for Kijani Prospects Ltd. 

Business Information Report (extract) on Kijani Prospects Limited

#

Ratio Calculated

2020

2021

1) Current Ratio

2.5:1

2.2:1

2) Acid Test Ratio

0.7:1

1.1:1

3) Receivables Collection Period

49.5 days

33.3 days

4) Payables Settlement Period

24.8 days

28.7 days

5) Inventory Turnover Rate

80.7 days

63.5 days

Analyze the changes for each between 2020 and 2021, showing the potential impact upon Kijani Prospects Ltd 

in general and making reference to its management of its working capital in particular. (10 Marks)

Answer 1

Current Ratio

From 2020 the ratio has decreased.

This shows that the company’s ability to cover its short-term debt has reduced.

Acid Test

The ratio has increased from the year 2020 t0 2021. This shows the company’s most short-term assets to its most short-term liabilities has increased and therefore it has enough cash to pay its immediate liabilities, such as short-term debt. It disregards current assets that are difficult to liquidate quickly such as inventory.

Receivable’s collection period

This measures the number of days it takes, on average, to collect accounts receivable based on the average balance in accounts receivable. From the analysis, the period has reduced by 16.2 days and this indicates that there is less risk of payment default by customers and hence the company is safe.

Payables Settlement Period

This is the number of days that a company takes to pay its suppliers. From the analysis, the number of days increased from 2020 to 2021 and this is an indicator that the company is paying its suppliers more slowly, and its financial condition is worsening.

Inventory Turnover Rate

This shows the rate that inventory stock is sold, or used, and replaced. The higher the rate it shows that sales are good. From the data the number of days has reduced indicating that the sales are goods.