Superior Kitchens and Bathrooms Ltd. is a small business that sells kitchen and bathroom fixtures and accessories and also does design and installation. The business was started three years ago by Qing Liu. Initially the company’s operations consisted of kitchen and bathroom renovations for individual homes. In 2019, the company started providing design and installation services to local contractors to expand sales. As the contractor side of the business grew in 2020, the company purchased a truck for deliveries. All sales to individuals are cash on delivery, but for contracting jobs, customers are invoiced and are offered 30-day payment terms. The company’s suppliers offer terms of 30 days. Selected financial information for Superior Kitchens and Bathrooms Ltd. follows.

Required

a. Assume the growth in sales in 2020 is primarily from the contracting business. Calculate the gross margins and the profit margins and comment on whether you think the company should be focusing on the contracting business or the home market.

b. Calculate the company’s current ratio and quick ratio for both years and comment on the company’s liquidity. Do you think the company is more liquid or less in 2020? What items on the statement of financial position support your position?

c. Calculate the company’s accounts receivable turnover ratio for 2020. How quickly is the company collecting its receivables? Do you think it is doing a good job of managing its receivables?

d. Assume that 50% of the sales come from the contracting business and recalculate the accounts receivable turnover for 2020. How does that affect your assessment of how receivables are being managed?

e. Calculate the company’s inventory turnover ratio for 2020.

f. Calculate the company’s accounts payable turnover ratio for 2020. Are suppliers being paid on time? g. Using your analysis of the company’s receivables and payables, what would you recommend be done to improve the management of those accounts?

h. Prepare a brief memo to Qing outlining why it may be useful to break out the company’s financial results by segment (home market and contracting).

Transcribed Image Text:

2020 2019 Assets $ 12,040 $ 4,480 Cash Accounts receivable 19,700 13,000 8,400 Inventory 15,260 Land 21,000 21,000 Building and equipment 53,580 62,000 $130,000 Total assets $100,460 Liabilities and equity $ 13,300 $ 11,200 Accounts payable Short-term note payable 2,520 Mortgage payable current 3,500 3,500 Mortgage payable 31,500 35,000 Share capital 16,800 16,380 Retained earnings 34,380 62,380 Total liabilities and equity $130,000 $100,460 Other information Sales $262,000 $220,000 Cost of goods sold 110,000 103,000 Net income 28,000 9,700