One of Natalie’s friends, Curtis Lesperance, runs a coffee shop where he sells specialty coffees and prepares and sells muffins and cookies. He is eager to buy one of Natalie’s fine European mixers, which would enable him to make larger batches of muffins and cookies. However, Curtis cannot afford to pay for the mixer for at least 30 days. He asks Natalie if she would be willing to sell him the mixer on credit. Natalie comes to you for advice.
Go to the book’s companion website, www.wiley.com/college/weygandt, to see the completion of this problem.
SOLUTION
(a) Answers to Natalie’s questions
1. Calculations you should perform on the statements are:
Working capital = Current assets – Current liabilities
Current ratio = Current assets ÷ Current liabilities
Inventory turnover = Cost of goods sold ÷ Average inventory
Days sales in inventory = Days in the year ÷ Inventory turnover
Given the type of business it is unlikely that Curtis would have a significant amount of accounts receivable.
Positive working capital and a high current ratio are indications that the company has good liquidity and will be more likely to be able to pay for the mixer. The inventory turnover and days sales in inventory will provide additional information – the days sales in inventory will tell you how long, on average, it takes for inventory to be sold.
2. Other alternatives to extending credit to Curtis include:
Waiting for 30 days to make the sale.
Have Curtis borrow from the bank.
Have Curtis use a credit card to finance the purchase.
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