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 the amount and the handling of accounts receivable could you make to the new owners?
c. What recommendations relative to the 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?