Question

Pine Co has the following ratios for 2018 and 2017: 2018 2017 Current ratio 0.9 : 1 1.3 : 1 Trade receivable days 74 days 51 days Trade payable days 31 days 45 days Inventory days 42 days 37 days Which of the following is true? Answer choices:

1)Pine Co is suffering from a worsening liquidity position in 2018

2)Pine Co's liquidity and working capital have improved in 2018

3)Pine Co is receiving cash from customers more quickly in 2018 than in 2017

4)Pine Co is taking longer to pay suppliers in 2018 than in 2017

Answer 1

The correct answer is Option 1. The liquidity poistion has worsened in 2018 because current ratio is 0.9:1 in 2018. In 2017, the current ratio was better when it was 1.3:1

Option 2 is incorrect because liquidity has worsened, as current ratio has decreased.

Option 3 is incorrect, because the days the customer are taking to pay has increased to 74 days from 51 days.

Option 4 is incorrect, because the company is paying its suppliers earlier in 2018 as compared to 2017 because trade payables has gone down from 45 days (2017) to 31 days in 2018.