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Homework answers / question archive / Wisconsin operates in the fashion wholesale business and its management team has become increasingly concerned about the liquidity of the entity
Wisconsin operates in the fashion wholesale business and its management team has become increasingly concerned about the liquidity of the entity. It has asked you for your opinion and you have calculated the following ratios to help you with your assessment: 30 June 20x1 30 June 20X0 Inventory holding period 110 days 54 days 67 days 70 days Receivables collection period Payables payment period 150 days 100 days Current ratio 1.5:1 1.8:1 Quick ratio 0.7:1 1.4:1 Which one of the following is NOT a valid statement about the ratios shown above? Select one: 0 a. The increase in inventory holding period is a significant concern as there a high risk of obsolescence in the industry. b. The deterioration in the ratios shown at the 30 June 20x1 year-end could simply be a result of a significant purchase of goods being made on credit terms close to the year-end. c. Wisconsin are attempting to finance their increased inventory holding period by delaying payments to suppliers. d. The significant increase in payables payment period will have caused the cash position to worsen dramatically. O
Answer:
Option (d) The significant increase in payables payment period will have caused the cash position to worsen dramatically.
Explanation:
Increase in the payables payment period will not caused the cash position worst because we were getting early payment from the receivable and we are financing our inventory holding with delaying payment of the payables/suppliers. So that we can have an advantage of cash surplus in between the payment period and can invest the same as working capital.
Further, increase in inventory holding period can be an indication of the risk of obsolescence in the inventory. Further it can ne said that organisation is increasing inventory holding period by increasing payables payment period and it shows the increased credit purchase by the organisation.
