Park Avenue Tire Company has been operating in Winnipeg for more than 30 years and has a very loyal customer base. The company sells and installs tires and the owners pride themselves on the excellent business relationships they have developed with both their customers and suppliers. The company often sells tires on credit, allowing customers to pay their balances within 30 days. Collection of accounts receivable has never been a problem, with most people paying their balances within 60 days.
Park Avenue purchases tires from most of the large national brands and, due to the nature of the business, generally maintains a fairly large inventory. It is essential that the company have the necessary tires on hand to meet customer needs due to increased competition from large retailers such as Canadian Tire and Walmart.
Prepare a report for Chris Park detailing options that he can take to alleviate the company’s cash problems. Remember that you are to present options, not recommendations. As a basis for the report, you should calculate and comment on the following ratios:
a. Current ratio
b. Quick ratio
c. Receivables turnover ratio and average collection period
d. Inventory turnover ratio and days in inventory