(Solved): 2. Liquidity Ratios A Liquid Asset Can Be Converted Quickly To Cash With Little Sacrifice In Its Val...
2. Liquidity ratios
A liquid asset can be converted quickly to cash with little sacrifice in its value.
Which of the following asset classes is generally considered to be the least liquid?
-Inventories
-Cash
-Accounts receivable
The most recent data from the annual balance sheets of Fitcom Corporation and Zebra Paper Corporation are as follows:
Balance Sheet December 31st31st (Millions of dollars)
| Zebra Paper Corporation | Fitcom Corporation | Zebra Paper Corporation | Fitcom Corporation | ||
| Assets | Liabilities | ||||
| Current assets | Current liabilities | ||||
| Cash | $2,296 | $1,476 | Accounts payable | $0 | $0 |
| Accounts receivable | 840 | 540 | Accruals | 506 | 0 |
| Inventories | 2,464 | 1,584 | Notes payable | 2,869 | 2,700 |
| Total current assets | $5,600 | $3,600 | Total current liabilities | $3,375 | $2,700 |
| Net fixed assets | Long-term bonds | 4,125 | 3,300 | ||
| Net plant and equipment | 4,400 | 4,400 | Total debt | $7,500 | $6,000 |
| Common equity | |||||
| Common stock | $1,625 | $1,300 | |||
| Retained earnings | 875 | 700 | |||
| Total common equity | $2,500 | $2,000 | |||
| Total assets | $10,000 | $8,000 | Total liabilities and equity | $10,000 | $8,000 |
Fitcom Corporation’s current ratio is ___ , and its quick ratio is ___; Zebra Paper Corporation’s current ratio is___, and its quick ratio is___. Note: Round your values to four decimal places.
Which of the following statements are true? Check all that apply.
-Zebra Paper Corporation has a better ability to meet its short-term liabilities than Fitcom Corporation.
-If a company’s current liabilities are increasing faster than its current assets, the company’s liquidity position is weakening.
-An increase in the quick ratio over time usually means that the company’s liquidity position is improving and that the company is managing its short-term assets well.
-Compared to Fitcom Corporation, Zebra Paper Corporation has less liquidity and a lower reliance on outside cash flow to finance its short-term obligations.
-An increase in the current ratio over time always means that the company’s liquidity position is improving.
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