Analysis Case 13-16 Analyzing financial statements; liquidity ratios 013-1 @ IGF

Question

Analysis Case 13-16 Analyzing financial statements; liquidity ratios 013-1 @ IGF Foods Company is a large, primarily domestic, consumer foods company involved in the manufacture, distribution and sale of a variety of food products. Industry averages are derived from Troy's The Almanac of Business and Industrial Financial Ratios. Following are the 2018 and 2017 comparative balance sheets for IGF. (The financial data we use are from actual financial statements of a well-known corporation, but the company name used is fictitious and the numbers and dates have been modified slightly.) Page 765

Explanation / Answer

1.

Current ratio = Total current assets/Total current liabilities

Here,

Total current assets for 2018 = $1,879

And,

Total current liabilities for 2018 = $1,473

Therefore,

Current ratio for 2018 = $1,879/$1,473 = 1.28 times

The current ratio for IGF is lower than the industry average. That means IGF's ability to repay its current liabilities when they are due, using its current assets is not as good as other companies in the industry. Also, that IGF is managing its current assets less efficiently than other companies in the industry.

2.

Quick ratio = (Total current assets - Inventories - Prepaid expenses)/Total current liabilities

Therefore,

Quick ratio for 2018 = ($1,879 - $914 - $212)/$1,473 = 0.51 times

The quick ratio for IGF is also lower than the industry average. That means IGF's ability to repay its current liabilities using its cash and cash equivalents is not as good as other companies in the industry.

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