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(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.



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