Description of Liquidity ratios
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2. Gulf and Northern total current assets, net working capital, and inventory for each of the past four years is as follows:
1999 2000 2001 2002
Total current asset
Net working capital
Inventory
27,000
9,600
7,200
24,000
9,900
6,900
22,000
9,300
6,900
17,000
7,950
6,000
a. Calculate the firm's liquidity ratios for each year. Compare the resulting time series of each measure of liquidity (i.e. net working capital, current ratio, and quick ratio).
b. Comment on the firm's liquidity over the period.
c. Do the following inventory turnover ratios for Gulf and Northern each year in the period and industry averages support or conflict with your evaluation in part b? why?
1999 2000 2001 2002
Gulf and Northern
Industry average
6.4
11.1
7.0
10.8
6.8
11.2
6.3
10.6
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Solution Summary
This discusses the steps to compute and interpret Liquidity ratios
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Analysis
Liquidity is a company's ability to meet its maturing short-term obligations. Liquidity is important for conducting business activity especially in times of adversity such as when operating losses occur due to economic conditions or drastic price increases of raw materials or parts. Liquidity must be sufficient to cushion such losses. If not, ...
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