C251 – Accounting Capstone Task 1: Yellow Leaf Fashion Inc

C251 – Accounting Capstone Task 1: Yellow Leaf Fashion Inc. H1: Explain what each of the two liquidity ratios calculated in part G1 indicates about the company’s financial position and performance. Yellow Leaf Fashion’s current ratio is 4.83. The company’s high liquidity measurement signifies that it has four times as many assets to meet its short-term obligations. From a potential creditor’s point of view, Yellow Leaf Fashion would appear to be a reliable debtor, and more importantly a company that is more likely than not to pay them back on time. However, the company’s current ratio is starkly higher than the industry average of 1.0 to 1.5, which raises concerns of its efficiency through utilization of its current assets. For example, the company’s $503,000 increase in accounts receivables, implies its sales are driven mostly on account. Being that accounts receivables are not easily converted into cash, the 4.83 measurement can be misleading, especially if Yellow Leaf Fashion is unable to collect on these on-account balances. For the year ended 2014, Yellow Leaf Fashion saw a 97% increase in bad debts expense and a staggering 1,232% increase for the year ended 2013. The company’s ability to collect on its receivables balances would be of the upmost importance for meeting its current obligations, being that its receivables make up 43% of its current assets. On the other hand, Yellow Leaf Fashion, has shown to maintain a steady influx of short-term obligations as well. With relatively low accounts payable in comparison to total current assets, the company puts itself in an advantageous position of paying its current bills on time. Ultimately, the 4.83 measurement, while as described above, can be misleading, does signify an accurate representation of Yellow Leaf Fashions ability to pay it