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.
|
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
|
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 receivable 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?