2. Liquidity ratios

A liquid asset can be converted quickly to cash with little sacrifice in its value.

Question #1 Which of the following asset classes is generally considered to be the least liquid? A. Cash B. Inventories C. Accounts receivable

The most recent data from the annual balance sheets of Pellegrini Southern Inc. and Zebra Paper Corp. are as follows:

Balance Sheet December 31stst (Millions of dollars)

	Zebra Paper Corp.	Pellegrini Southern Inc.		Zebra Paper Corp.	Pellegrini Southern Inc.
Assets			Liabilities
Current assets			Current liabilities
Cash	$5,166	$3,321	Accounts payable	$0	$0
Accounts receivable	1,890	1,215	Accruals	1,139	0
Inventories	5,544	3,564	Notes payable	6,455	6,075
Total current assets	12,600	8,100	Total current liabilities	7,594	6,075
Net fixed assets			Long-term bonds	9,281	7,425
Net plant and equipment	9,900	9,900	Total debt	16,875	13,500
			Common equity
			Common stock	3,656	2,925
			Retained earnings	1,969	1,575
			Total common equity	5,625	4,500
Total assets	22,500	18,000	Total liabilities and equity	22,500	18,000

Question #2 Pellegrini Southern Inc.s current ratio is ________ , A. 2.8333 B. 2.5333 C. 1.8333 D. 1.3333 Question #3 And its quick ratio is ________ ; A. 1.1201 B. 0.9292 C. 0.8960 D. 0.7467 Question #4 Zebra Paper Corp.s current ratio is _______ , A. 1.6592 B. 2.1592 C. 2.8592 D. 3.1592 Question #5 And its quick ratio is ________ . A. 1.3938 B. 0.9292 C. 0.7467 D. 1.1150

Question #6 Which of the following statements are TRUE? Check all that apply.

A. Zebra Paper Corp. has a better ability to meet its short-term liabilities than Pellegrini Southern Inc.. B. If a companys current liabilities are increasing faster than its current assets, the companys liquidity position is weakening. C. 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. D. Compared to Pellegrini Southern Inc., Zebra Paper Corp. has less liquidity and a lower reliance on outside cash flow to finance its short-term obligations. E. An increase in the current ratio over time always means that the companys liquidity position is improving.