Reference no: EM132706320

CREDIT ANALYSIS - LIQUIDITY

ACTIVITY NO. 2 - Deadline of submission will be on Monday (November 23, 2020) until 5:00pm

A. The Lux Company experiences the following unrelated events and transactions during Year 1.
The company's existing current ratio is 2:1 and its quick ratio is 1.2:1.

1. Lux wrote off $5,000 of accounts receivable as uncollectible.
2. A bank notifies Lux that a customer's check for $411 is returned marked insufficient funds. The customer is bankrupt.
3. The owners of Lux Company make an additional cash investment of $7,500.
4. Inventory costing $600 is judged obsolete when a physical inventory is taken.
5. Lux declares a $5,000 cash dividend to be paid during the first week of the next reporting period.
6. Lux purchases long-term investments for $10,000.
7. Accounts payable of $9,000 are paid.
8. Lux borrows $1,200 from a bank and gives a 90-day, 6% promissory note in exchange.
9. Lux sells a vacant lot for $20,000 that had been used in its operations.
10. A three-year insurance policy is purchased for $1,500.

Required:
Separately evaluate the immediate effect of each transaction on the company's:
a. Current ratio.
b. Quick (acid-test) ratio.
c. Working capital.

B. Interpret the effect of the following six independent events and transactions for each of the following:

a. Accounts receivable turnover (currently equals 3.0).
b. Days' sales in receivables.
c. Inventory turnover (currently equals 3.0).

The three columns to the right of each event and transaction are identified as (a), (b), and (c) corresponding to the three liquidity measures. For each event and transaction indicate the effect as an increase (I), decrease (D), or no effect (NE).

C. Interpret the effect of the following six independent events and transactions for each of the following:

a. Accounts receivable turnover (equals 4.0 prior to the event).
b. Days' sales in receivables.
c. Inventory turnover (equals 4.0 prior to the event).

The three columns to the right of each event and transaction are identified as (a), (b), and (c) corresponding to the three liquidity measures. For each event and transaction indicate the effect as an increase (I), decrease (D), or no effect (NE).

D. Refer to the financial statements of Campbell Soup Company in Appendix A of our Book, pages A46 - A66

Required:
a. Compute the following liquidity measures for Year 10:
(1) Current ratio.
(2) Acid-test ratio.
(3) Accounts receivable turnover (accounts receivable balance at end of Year 9 is $564.1).
(4) Inventory turnover (inventory balance at end of Year 9 is $816.0).
(5) Days' sales in receivables.
(6) Days' sales in inventory.
(7) Conversion period (operating cycle).
(8) Cash and cash equivalents to current assets.
(9) Cash and cash equivalents to current liabilities.
(10) Days' purchases in accounts payable.
(11) Net trade cycle.
(12) Cash flow ratio.

b. Assess Campbell's liquidity position using results from (a).

Attachment:- Activity no - Credit Analysis.rar