Case Study Cartwright Lumber Company
In addition to increased liabilities and long-term debt, Cartwright is now purchasing inventory on trade credit. Based on the information provided on the balance sheet this is the first time the company has done this since incorporating in 2001. The balance sheet also shows that cash has been steadily decreasing and Cartwright carried no …show more content…
Cartwright continues to let his trade credit increase, his cash on hand will also increase leading to the need for a loan amount closer to his estimate. However, the information provided does not explicitly state that he will continue to increase his trade credit. Further, an increase in trade credit means increase in A/P which can eventually result to using up more cash in the long run.
3) As Mr. Cartwright’s financial advisors, we would recommend against obtaining a loan to expand his business. We calculated some financial ratios to reach this conclusion and found poor management of trade credit and AR. The asset ratio demonstrated that over the three years Mr. Cartwright went from an average of 37 days to collect AR to 43 in 2003 based on projections this will continue to rise to 46 days in 2004.
Additionally, the current ratio and the quick ratio has been steadily decreasing which demonstrates a decreased liquidity and it is becoming more difficult to cover liabilities. The quick ratiois also decreasing demonstrating further trouble with