2. Liquidity ratios

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

Which of the following asset classes is generally considered to be the least liquid?

A. Accounts receivable

B. Cash

C. Inventories

The most recent data from the annual balance sheets of Free Spirit Industries Inc. and LeBron Sports Equipment Inc. are as follows:

Balance Sheet December 31stst(Millions of dollars)

	LeBron Sports Equipment Inc.	Free Spirit Industries Inc.		LeBron Sports Equipment Inc.	Free Spirit Industries Inc.
Assets			Liabilities
Current assets			Current liabilities
Cash	$1,722	$1,107	Accounts payable	$0	$0
Accounts receivable	630	405	Accruals	380	0
Inventories	1,848	1,188	Notes payable	2,151	2,025
Total current assets	4,200	2,700	Total current liabilities	2,531	2,025
Net fixed assets			Long-term bonds	3,094	2,475
Net plant and equipment	3,300	3,300	Total debt	5,625	4,500
			Common equity
			Common stock	1,219	975
			Retained earnings	656	525
			Total common equity	1,875	1,500
Total assets	7,500	6,000	Total liabilities and equity	7,500	6,000

Free Spirit Industries Inc.s quick ratio is ________ , and its current ratio is __________ ; LeBron Sports Equipment Inc.s quick ratio is ____________ , and its current ratio is _______________.

Which of the following statements are true? Check all that apply.

A. LeBron Sports Equipment Inc. has a better ability to meet its short-term liabilities than Free Spirit Industries 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 Free Spirit Industries Inc., LeBron Sports Equipment Inc. 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.