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 leastliquid?

Accounts receivable

Inventories

Plant and equipment

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

Balance Sheet December 31st31st(Millions of dollars)

	LeBron Sports Equipment Corporation	Free Spirit Industries Corporation		LeBron Sports Equipment Corporation	Free Spirit Industries Corporation
Assets			Liabilities
Current assets			Current liabilities
Cash	$3,157	$2,029	Accounts payable	$0	$0
Accounts receivable	1,155	743	Accruals	696	0
Inventories	3,388	2,178	Notes payable	3,944	3,712
Total current assets	$7,700	$4,950	Total current liabilities	$4,640	$3,712
Net fixed assets			Long-term bonds	5,672	4,538
Net plant and equipment	6,050	6,050	Total debt	$10,312	$8,250
			Common equity
			Common stock	$2,235	$1,788
			Retained earnings	1,203	962
			Total common equity	$3,438	$2,750
Total assets	$13,750	$11,000	Total liabilities and equity	$13,750	$11,000

Free Spirit Industries Corporations quick ratio is , and its current ratio is ; LeBron Sports Equipment Corporations quick ratio is , and its current ratio is .

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

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

If a companys current liabilities are increasing faster than its current assets, the companys liquidity position is weakening.

An increase in the quick ratio over time usually means that the companys liquidity position is improving and that the company is managing its short-term assets well.

Compared to Free Spirit Industries Corporation, LeBron Sports Equipment Corporation 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 companys liquidity position is improving.