Using Ratios to Analyze Liquidity You have received the following financial information of Morrow Company and Valley Enterprises:

Before investing in either company, you have decided to use ratio analysis to assist in your evaluation.

a. Compute the current ratios for Morrow and Valley. Which company has the higher current ratio?

b. Compute the quick ratio for Morrow and Valley. Which company has the higher quick ratio?

c. Compute the days sales in receivables ratios for Morrow and Valley. Which company is better?

d. Compute the days sales in inventory ratios for Morrow and Valley. Which company is better?

e. What is the number of days in the operating cycle for Morrow and Valley?

f. On balance, which company appears to have the higher degree of liquidity? Does there appear to be a reason to be concerned about the liquidity position of either company?
Explain.

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Cash Accounts receivable Morrow Company $ 60,000 300,000 360,000 70,000 30,000 Valley Enterprises $ 20,000 150,000 100,000 $ 270,000 90,000 30,000 Inventory Total current assets $ 720,000 Accounts payable $ 110.000 Wages payable Other payables 10,000 Total current liabilities $ 210,000 $ 130.000 Sales for year Cost of goods sold for year $1,600,000 $1,000,000 $1,200,000 $ 650,000