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(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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Expert Answer


Answer a. Inventories is generally considered to be the least liquid. Answer b. Zebra Paper Corporation: Current Ratio = Current Assets / Current Liabilities Current Ratio = $5,600 / $3,375 Current Ra
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