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MB0041 Q.1 Selected financial information about Vijay merchant company is given below:

2010 2009
Sales 69,000 43,000
Cost of Goods Sold 57,000 32,500
Debtors 7,200 3,000
Inventories 11,400 5,500
Cash 1,500 800
Other current assets 4,000 2,700
Current liabilities 16,000 11,000

Compute the current ratio, quick ratio, average debt collection period and inventory turnover for 2009 and 2010. State whether there is a favorable or unfavorable change in liquidity from 2009 to 2010. At the beginning of 2009, the company had debtors of Rs..2500 and inventory of Rs.3000. [10 Marks]

Answer:
A liquidity ratio provides information about a firm’s ability to meet its short-term financial obligations. They are of particular interest to those extending short-term financial obligations. They are of particular interest to those extending short-term credit to the firm. Two frequently used liquidity ratios are the current ration(or working capital ratio) and the quick ratio.


The current ratio is the ratio of current assets to current liabilities:

Current Ratio = Current Assets / Current Liabilities


i) For the year 2010:
Current Ratio = CA / CL
= 4,000 / 16,000
= 0.25
For the year 2009:
Current Ratio = 2,700 / 11,000
= 0.2454


ii) Quick Ratio: Quick ratio is also known as liquid ratio or acid test ratio.



For the year 2010
Quick Ratio = (4,000+7,200) / 16,000
= 0.7

For the year 2009
Quick Ratio = (2700+3000) / 11,000
= 0.5181

iii) For the year 2010


Debtor’s Turnover Ratio = 69,000 / 7,200
= 9.58


Average debt collection period = (365 days) / 9.58
= 38.1 days

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