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Question - At the end of 2021, ACME Corporation faced increasing competition leading to a build up of inventory and declining profitability and liquidity. In an effort to generate more revenue and improve the company's financial position, the management team determined that the best course was to reduce prices and extend generous credit terms that would generate higher sales and cash flow. The results of the initiative are shown in the following table:
Ratio
2021
2022
Industry
Profit Margin
10%
7%
12%
Gross Profit Margin
54%
51%
56%
Debt to Assets
68%
67%
72%
Times Interest Earned
6.1
3.5
4.3
Current Ratio
2.0
1.7
2.2
Accounts Receivable Turnover
8.1
5.2
6.0
Inventory Turnover
3.2
6.5
5.0
Free Cash Flow (thousands)*
$125
$97
$127
*Capital expenditures remained unchanged and no dividends were declared.
Using the above information to support your answer, complete the following analysis:
1. Discuss ACME Corporation's liquidity.
2. Discuss ACME Corporation's profitability.
3. Discuss ACME Corporation's solvency.
4. Conclude on the success of management's initiative and explain the reason for your conclusion.
5. Recommend two actions based on your analysis and conclusion.
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