Question

Liquidity Management. Bauman Company's total current assets, total current liabilities, and inventory for each of the past four years. Current assets 2012: $16,950. 2013: $21,900. 2014: $22,500. 2015: $27,000. Total current liabilities 2012: $9,000. 2013: $12,600 2014: $12,600. 2015 $: 17,400. Inventory 2012: $6,000. 2013: $ 6,900. 2014: $ 6,900. 2015: $ 7,200. A. Calculate the firm's current and quick ratios for each year. Compare the resulting time series for these measures of liquidity. B. Comment on the firm's liquidity over the 2012-2013 period. C. If you were told that Bauman Company's inventory turnover for each year in the 2012-2015 period and the industry averages were as follows, would this information support or conflict with your evaluation in part B? Why? Inventory turnover: 2012 Bauman company 6.3. 2013. 6.8. 2014 7.0. 2015 6.4. Industry average: 2012. 10.6. 2013: 11.2. 2014 10.8. 2015 11.0

Answer 1

Answer:

Current Ratio   1,88   1,74    1,79      1,55

Quick Ratio             1,22       1,19     1,24      1,14

The Company liquity decrease over time

During 2012-2015 The Company adquire more assets on account because both increase in a similar ammount

The Company's liquity is enought to cover their obligation so it is facing no problem of liquity

The Inventory TO being lower is a sing that if the company makes the endeavor of increase their sale it will increase their liquity. So it could be see as a good sing, because they have room to improve and generate more cash.

Explanation:

The Current Ratio will be:

$\frac{currentassets}{currentliabilities}$

Remember that:

current assets: concepts that are cash or will become cash within a year.

current laibilities: obligation to pay or do that will be settle within a year.

Year           2012      2013    2014    2015

Assets        16950 21900 22500 27000

Liabilities 9000 12600 12600   17400

Current Ratio   1,88   1,74    1,79      1,55

Now the Quick Ratio will be:

$\frac{currentassets-inventory}{currentliabilities}$

This is a more harder ratio, because we are asking, what would happen if the company doesn't convert any of their inventory in cash within a year.

Year                   2012 2013 2014 2015

Assets                 16950 21900 22500 27000

Inventory          6000   6900   6900    7200

Quick Assets         10950 15000 15600  19800

Liabilities           9000 12600 12600   17400

Quick Ratio             1,22       1,19     1,24      1,14

The Company liquity decrease over time as you can see.

Inventory TurnOver:

Sales / Average Inventory

This is a value to check how many times the company is selling their inventory, a high value means it is selling their inventory fast, and thereforetheir inventory cost for keeping the merchandise, lower.

If the value is lower it may mean that the company is stocking in excess or it may be having problems doing sales.

The Bauman Company is having a lower rotation than the industry so it may be cause their inventory is higher than other industries or it may not be doing quite well on the marketing department.