1. Why has Clarkson Lumber borrowed increasing amounts despite its consistent profitability ?
Clarkson’s business is growth with average Net Sales 24.50% from year 1993 to year 1995. The Net Sales Q1 year 1996 is achieved 23.50% of Net Sales year 1995. To achieve the target Net Sales year 1996, Clarkson should borrow the Loan from other Bank. If not, the estimation of achievement Net Sales year 1996 is 4 times of Net Sales Q1 year 1996 or decrease -6.00% of Net Sales year 1995. This situation will parallel with the Total COGS.
However, as its business size grows, their A/R increased, which means that it is getting difficult to collect cash. On the other hand, A/P decreased for the same period, which means that the company paid cash for A/P, resulting in critical cash shortage. Furthermore, the A/P payment period is shorter than A/R collection periods, the company’s cash problem happens to be accelerated.
2. How has Clarkson met the financing needs of the company from 1993 – 1995 ? Has the financial strength of the company improved or deteriorated ?
The company has borrowed from bank as a term of note payable.
| 1993 | 1994 | 1995 | Q1 1996 |
Notes payable, bank| $ -- | $60 | $390 | $399 |
Deteriorated. The liquidity in the company has kept decreased over the 3 years. Current ratio has gone down from 2.4945 to 1.1480, Quick Ratio down from 1.2691 to 0.6085, Cash Ratio down to 0.1564 to 0.0515, etc.
| | |Low Profit Outlets | |High Profit Outlets | |High vs Low Profit Outlets | |Current Ratio | |1.31 | |2.52 | |92.37% | |Return on Sales | |-0.7 | |4.3 | |714.29% | |Return on Assets | |-1.8 |...