(Solved): 2. Liquidity Ratios A Liquid Asset Can Be Converted To Cash Quickly Without Significantly Impacting ...
2. Liquidity ratios
A liquid asset can be converted to cash quickly without significantly impacting the asset’s value.
Which of the following asset classes is generally considered to be the most liquid?
-Cash
-Inventories
-Accounts receivable
The most recent data from the annual balance sheets of N&B Equipment Company and Scramouche Opera Company are as follows:
Balance Sheet December 31st31st (Millions of dollars)
| Scramouche Opera Company | N&B Equipment Company | Scramouche Opera Company | N&B Equipment Company | ||
| Assets | Liabilities | ||||
| Current assets | Current liabilities | ||||
| Cash | $574 | $369 | Accounts payable | $0 | $0 |
| Accounts receivable | 210 | 135 | Accruals | 127 | 0 |
| Inventories | 616 | 396 | Notes payable | 717 | 675 |
| Total current assets | $1,400 | $900 | Total current liabilities | $844 | $675 |
| Net fixed assets | Long-term bonds | 1,031 | 825 | ||
| Net plant and equipment | 1,100 | 1,100 | Total debt | $1,875 | $1,500 |
| Common equity | |||||
| Common stock | $406 | $325 | |||
| Retained earnings | 219 | 175 | |||
| Total common equity | $625 | $500 | |||
| Total assets | $2,500 | $2,000 | Total liabilities and equity | $2,500 | $2,000 |
N&B Equipment Company’s quick ratio is __ , and its current ratio is__; Scramouche Opera Company’s quick ratio is __, and its current ratio is __ .
Which of the following statements are true? Check all that apply.
-Scramouche Opera Company has a better ability to meet its short-term liabilities than N&B Equipment Company.
-If a company’s current liabilities are increasing faster than its current assets, the company’s liquidity position is weakening.
-If a company has a quick ratio of less than 1 but a current ratio of more than 1 and if the difference between the two ratios is large, then the company depends heavily on the sale of its inventory to meet its short-term obligations.
-Compared to N&B Equipment Company, Scramouche Opera Company 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.
Expert Answer
Buy This Answer $6
-- OR --
Subscribe $20 / Month