91Ó°ÊÓ

Case 1: Northland Cranberries

Despite being a publicly traded company only since 1987, Northland Cranberries of Wisconsin Rapids, Wisconsin, is one of the world’s largest cranberry growers. During its short life as a publicly traded corporation, it has engaged in an aggressive growth strategy. As a consequence, the company has taken on significant amounts of both short-term and long-term debt. The following information is taken from recent annual reports of the company.

Northland Cranberries

	Current year	Prior year
Current assets	\(6,745,759	\)5,598,054
Total assets	107,744,751	83,074,339
Current liabilities	10,168,685	4,484,687
Total liabilities	73,118,204	49,948,787
Shareholders’ equity	34,626,547	33,125,552
Sales	21,783,966	18,051,355
Cost of goods sold	13,057,275	8,751,220
Interest expenses	3,654,006	2,393,792
Income tax expenses	1,051,000	1,917,000
Net income	1,581,707	2,942,954

Instructions

(a) Evaluate the company’s liquidity by calculating and analyzing working capital and the current ratio.

(b) The discussion of the company’s liquidity, shown below, was provided by the company in the Management Discussion and Analysis section of the company’s annual report. Comment on whether you agree with management’s statements, and what might be done to remedy the situation.

The lower comparative current ratio in the current year was due to $3 million of short-term borrowing then outstanding which was incurred to fund the Yellow River Marsh acquisitions last year. As a result of the extreme seasonality of its business, the company does not believe that its current ratio or its underlying stated working capital at the current, fiscal year-end is a meaningful indication of the Company’s liquidity. As of March 31 of each fiscal year, the Company has historically carried no significant amounts of inventories and by such date, all of the Company’s accounts receivable from its crop sold for processing under the supply agreements have been paid in cash, with the resulting cash received from such payments used to reduce indebtedness. The Company utilizes its revolving bank credit facility, together with cash generated from operations, to fund its working capital requirements throughout its growing season.

Step by step solution

01

Definition of Financial Ratios

Financial ratios can be defined as the metrics that evaluate the financial position by comparing various line items reported in the financial statement. These ratios provide information on liquidity, solvency, profitability, and efficiency.

02

Evaluation of the business liquidity

Calculation of working capital:

Particular	Current year	Prior year
Current assets	$6,745,759	$5,598,054
Less: Current liabilities	(10,168,685)	(4,484,687)
Working capital	($3,422,926)	$1,113,367

Calculation of current ratio:

Current year:

$\begin{array}{rcl}\mathbf{Current}\mathbf{}\mathbf{ratio}& \mathbf{=}& \frac{\mathbf{Current}\mathbf{}\mathbf{assets}}{\mathbf{Current}\mathbf{}\mathbf{liabilities}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{6}\mathbf{,}\mathbf{745}\mathbf{,}\mathbf{759}}{\mathbf{10}\mathbf{,}\mathbf{168}\mathbf{,}\mathbf{685}}\\ & \mathbf{=}& \mathbf{0}\mathbf{.}\mathbf{66}\end{array}$

Prior year:

$\begin{array}{rcl}\mathbf{Current}\mathbf{}\mathbf{ratio}& \mathbf{=}& \frac{\mathbf{Current}\mathbf{}\mathbf{assets}}{\mathbf{Current}\mathbf{}\mathbf{liabilities}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{5}\mathbf{,}\mathbf{598}\mathbf{,}\mathbf{054}}{\mathbf{\$}\mathbf{4}\mathbf{,}\mathbf{484}\mathbf{,}\mathbf{687}}\\ & \mathbf{=}& \mathbf{1}\mathbf{.}\mathbf{25}\end{array}$

The liquidity position of the business entity is not good because the working capital is negative, and the current ratio is less than 1.

03

Statement of the management

The statement of the management is correct that due to seasonality in the business, the working capital and current ratio figures do not indicate the real liquidity position of the business entity. The business entity here can prepare a cash flow statement to reflect the cash availability and the business entity's ability to meet the obligations being paid in cash.

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