You have been provided the financial statements, balance sheet and cash flow of K-L Fashions. The
director of K-L Fashions seeks your advice on the following questions in order to make important business decisions.
Explain your answer deriving information from the financial statements and proving your answer with the necessary ratios
1. How well is the company doing as an investment?
2. How well has management employed the company's assets?
3. Are profits high enough, given the level of sales?
4. How well are the company's assets being employed to generate sales revenue?
5. Are receivables coming in too slowly?
6. Is too much cash tied up in inventories?
7. Short-term creditors, including managers who extend credit to trade customers, are interested in the solvency of
borrowers or customers. As a result, they tend to focus on the current section of the balance sheet. The same
calculations that a manager does on his/her own financial statements can also be done on a debtor’s financial
statements. The most widely used financial ratios used to answer questions of short-term solvency are the
current ratio and quick ratio. Does this customer have sufficient cash or other liquid assets to cover its short-term
obligations?
8. How quickly does the prospective credit customer pay its bills?
9. Bankers and other long-term creditors want to be assured of receiving interest and principal when each become
due. These creditors are particularly interested in the earning power and the present and future financial
capacity of the borrower. As a potential or present long-term borrower, is the company's debt load excessive?
10. Are earnings and cash flow sufficient to cover interest payments and provide for some principal repayment?
You have been provided the financial statements, balance sheet and cash flow of K-L Fashions. The
director of K-L Fashions seeks your advice on the following questions in order to make important business decisions.
Explain your answer deriving information from the financial statements and proving your answer with the necessary ratios
1. How well is the company doing as an investment?
2. How well has management employed the company's assets?
3. Are profits high enough, given the level of sales?
4. How well are the company's assets being employed to generate sales revenue?
5. Are receivables coming in too slowly?
6. Is too much cash tied up in inventories?
7. Short-term creditors, including managers who extend credit to trade customers, are interested in the solvency of
borrowers or customers. As a result, they tend to focus on the current section of the balance sheet. The same
calculations that a manager does on his/her own financial statements can also be done on a debtor’s financial
statements. The most widely used financial ratios used to answer questions of short-term solvency are the
current ratio and quick ratio. Does this customer have sufficient cash or other liquid assets to cover its short-term
obligations?
8. How quickly does the prospective credit customer pay its bills?
9. Bankers and other long-term creditors want to be assured of receiving interest and principal when each become
due. These creditors are particularly interested in the earning power and the present and future financial
capacity of the borrower. As a potential or present long-term borrower, is the company's debt load excessive?
10. Are earnings and cash flow sufficient to cover interest payments and provide for some principal repayment?
