NEGATIVE CASH BALANCES. The Quaker Oats Company, the successful producer of breakfast cereal and other food products, included the following note in its 1993 annual report: e Cash equivalents are composed of all highly liquid investments with an original maturity of three months or less. As a result of the Company’s cash management system, checks issued but not presented to the banks for payment may create negative book cash balances. Such negative balances are included in trade accounts payable and amounted to $45.9 million, $37.6 million and $61.7 million as of June 30, 1993, 1992 and 1991, respectively.

Quaker’s 1993 annual report also states, “The ability of the Company to generate funds internally remains one of the Company’s significant financial strengths.” The report notes that the company has the highest rating on its short-term commercial paper and that it has access to short-term credit from financial institutions in the amount of $350 million.

The balance sheet at June 30, 1993, showed current assets of $1,067.6 million

(including cash, cash equivalents, and receivables of $539.9 million) and current liabilities of $1,105.1 million. Long-term liabilities total $1,148.3 million and represent about 41% of total assets.

REQUIRED:

1. What is the effect of an increase in negative cash balances on the quick ratio and working capital?

2. Describe and evaluate Quaker Oats’ liquidity.