Principles of Managerial Finance

CHAPTER 2 Financial Statements and Analysis 83

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2–13 Accounts receivable management An evaluation of the books of Blair Supply,

which follows, gives the end-of-year accounts receivable balance, which is

believed to consist of amounts originating in the months indicated. The company

had annual sales of $2.4 million. The firm extends 30-day credit terms.

a. Use the year-end total to evaluate the firm’s collection system.

b. If 70% of the firm’s sales occur between July and December, would this

affect the validity of your conclusion in part a?Explain.

2–14 Interpreting liquidity and activity ratios The new owners of Bluegrass Natural

Foods, Inc., have hired you to help them diagnose and cure problems that the

company has had in maintaining adequate liquidity. As a first step, you perform

a liquidity analysis. You then do an analysis of the company’s short-term activity

ratios. Your calculations and appropriate industry norms are listed.

a. What recommendations relative to the amount and the handling of inventory

could you make to the new owners?

b. What recommendations relative to amount and handling of accounts receiv-

able could you make to the new owners?

c. What recommendations relative to amount and handling of accounts payable

could you make to the new owners?

d. What results, overall, would you hope your recommendations would

achieve? Why might your recommendations not be effective?

2–15 Debt analysis Springfield Bank is evaluating Creek Enterprises, which has

requested a $4,000,000 loan, to assess the firm’s financial leverage and financial

risk. On the basis of the debt ratios for Creek, along with the industry averages

and Creek’s recent financial statements (which follow), evaluate and recommend

appropriate action on the loan request.

Ratio Bluegrass Industry norm

Current ratio 4.5 4.0

Quick ratio 2.0 3.1

Inventory turnover 6.0 10.4

Average collection period 73 days 52 days

Average payment period 31 days 40 days

Month of origin Amounts receivable

July $ 3,875

August 2,000

September 34,025

October 15,100

November 52,000

December  (^1)  (^9)  (^3) , (^0)  (^0)  (^0) 
Year-end accounts receivable $

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