The new owners of Pak. Electric Co. 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. Ratios Current Ratio Pak. Electric Co. 4.5 Industry Average 4.0 Quick Ratio Pak. Electric Co. 2.0 Industry Average 3.1 Inventory Turnover Pak. Electric Co. 6.0 Industry Average 10.4 Average Collection Period Pak. Electric Co. 73 days Industry Average 52 days Average Payment Period Pak. Electric Co. 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?
The new owners of Pak. Electric Co. 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.
Ratios
Current Ratio
Pak. Electric Co. 4.5
Industry Average 4.0
Quick Ratio
Pak. Electric Co. 2.0
Industry Average 3.1
Inventory Turnover
Pak. Electric Co. 6.0
Industry Average 10.4
Average Collection Period
Pak. Electric Co. 73 days
Industry Average 52 days
Average Payment Period
Pak. Electric Co. 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?
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