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Interpreting liquidity and activity ratios The new owners of Bluegras

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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. What
recommendations relative to the amount and the handling
of inventory could you make to the new owners? What
recommendations relative to the amount and the handling
of accounts receivable could you make to the new owners?
What recommendations relative to the amount and the
handling of accounts payable could you make to the new
owners? What results, overall, would you hope your
recommendations would achieve? Why might your
recommendations not be effective?
Solution
a. The industry norm for Inventory turnover is 10.4, while
that for the company is only 6, which indicate that while its
peers are holding inventories in stock for only 360/ 10.4 =
34.6 days, Bluegrass is holding inventories for 360 / 6 = 60
days on an average. This could mean that inventory policy
of the company is not in line with the industry. Slow
moving inventories can lead to accumulation, deterioration,
spoilage, pilferage and ultimate erosion in asset value, and

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severe liquidity problems.
Slow moving inventories is the cause of the abnormally
high current ratio and the lower than industry benchmark
quick ratio.
Therefore the new owners should revisit the inventory
policy, the reorder norms, and order an immediate physical
verification of inventories in stock, and make efforts to
liquidate them as soon as possible.
b. The average collection period of 73 days as compared
to industry average of 52 days is also very tardy. While
receivables of peer companies is turning over 360 / 52 =
6.9 times, accounts the receivables of Bluegrass turns
over only 360 /73 = 4.9 times a year. The receivables
policy should also be revamped to ensure that collections
are expedited.
c. While the remaining players in the industry pay their
accounts payables in 40 days, Bluegrass is forced to pay
its accounts payables in 31 days. Which means that the
company is unable to get adequate credit from its suppliers
probably because it is not considered to be as creditworthy
as its peers. Therefore, attempts should be made to
negotiate with suppliers for additional credit period, or look
for alternate vendors. They could look at bankers\'
acceptances during the initial phase to boost up the
confidence level of the suppliers.

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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. What recommendations relative to the amount and the handling of inventory could you make to the new owners? What recommendations relative to the amount and the handling of accounts receivable could you make to the new owners? What recommendations relative to the amount and the handling of accounts payable could you make to the new owners? What results, overall, would you hop e your recommendations would achieve? Why might your recommendations not be effective? Solution a. The industry norm for Inventory ...
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