Pincher Creek Mountain Equipment Ltd. (PCME) is an importer and national distributor of high-quality outdoor clothing and equipment. PCME has exclusive Canadian distribution rights for many of the products it purchases from manufacturers. The company orders merchandise throughout the year but must bring in stock in anticipation of the needs of retailers. Retailers place orders several months in advance of the delivery date and PCME must in turn place orders with the manufacturers. However, PCME must assess to what extent it should order more or less inventory than retailers ordered and how much of new products it should bring in. PCME must keep adequate inventory on hand because it's too time-consuming and costly to make special orders in most cases (for example, if a retailer decided that more of a particular item was needed, it wouldn't make sense in most cases for PCME to make the order). PCME normally gives its customer 60 days from the date of delivery to pay. The economy has deteriorated over the last few months. You have been provided with the following extracts from PCME's financial statements:

Required:

You have been asked to evaluate PCME's liquidity from the information provided.

(Be sure to use evaluation tools that have been introduced in this chapter as well as one from previous chapters.) Explain factors that could have given rise to your findings.

Consider the following issues in your report:

a. What are the possible ways that PCME could increase its inventory turnover ratio? Do you think these ways could be reasonably achieved?

b. How would an improvement affect the liquidity of the company? Explain.

c. Why is the ITO an important indicator of liquidity?

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Pincher Creek Mountain Equipment Ltd. Selected Financial Information for the Year Ended December 31, 2017 2016 2015 2014 Sales $7,716,270 S7,314,000 $6,900,000 Cost of sales 4,128,204 4,059,270 3,795,000 Gross margin 3,588,066 3,254,730 3,105,000 Cash $ 138,000 $ 264,000 $ 300,000 $ 258,000 Accounts receivable 1,935,883 1,459,880 1,339,806 1,314,000 Inventory 2,382,000 1,622,400 1,203,600 1,050,000 Other current assets 42,000 32,400 38,400 37,200 Short-term bank loan 1,200,000 900,000 630,000 540,000 Accounts payable and accrued liabilities 3,309,600 2,220,000 1,902,000 1,662,000