Robbins Ltd. is a wholesale distributor of professional equipment and supplies. The company’s sales have averaged about $900,000 annually for the three-year period 2018 to 2020. The firm’s total assets at the end of 2017 amounted to $850,000. The president of Robbins Ltd. has asked the controller to prepare a report that summarizes the financial aspects of the company’s operations for the past three years. This report will be presented to the board of directors at their next meeting. In addition to comparative financial statements, the controller has decided to present a number of relevant financial ratios that can help with identifying and interpreting trends. At the request of the controller, the accounting staff has calculated the following ratios for the 2018–2020 period:
In preparation of the report, the controller has decided first to examine the financial ratios independent of any other data to determine if the ratios themselves reveal any significant trends over the three-year period.
Instructions
a. The current ratio is increasing while the acid-test (quick) ratio is decreasing. Using the ratios provided, identify and explain the contributing factor(s) for this apparently divergent trend.
b. In terms of the ratios provided, what conclusion(s) can be drawn regarding the company’s use of financial leverage during the 2018–2020 period?
c. Using the ratios provided, what conclusion(s) can be drawn regarding the company’s net investment in plant and equipment?
d. Using the activity ratios provided for inventory and accounts receivable, comment on the effectiveness of working capital management.
