2. Liquidity ratios

A liquid asset can be converted to cash quickly without significantly impacting the assets value.

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

Inventories

Cash

Accounts receivable

The most recent data from the annual balance sheets of N&B Equipment Company and Scramouche Opera Company are as follows:

Balance Sheet December 31stst(Millions of dollars)

	Scramouche Opera Company	N&B Equipment Company		Scramouche Opera Company	N&B Equipment Company
Assets			Liabilities
Current assets			Current liabilities
Cash	$861	$553	Accounts payable	$0	$0
Accounts receivable	315	203	Accruals	190	0
Inventories	924	594	Notes payable	1,075	1,012
Total current assets	2,100	1,350	Total current liabilities	1,265	1,012
Net fixed assets			Long-term bonds	1,547	1,238
Net plant and equipment	1,650	1,650	Total debt	2,812	2,250
			Common equity
			Common stock	610	488
			Retained earnings	328	262
			Total common equity	938	750
Total assets	3,750	3,000	Total liabilities and equity	3,750	3,000

N&B Equipment Companys quick ratio is , and its current ratio is ; Scramouche Opera Companys quick ratio is , and its current ratio is .

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

N&B Equipment Company has less liquidity but also a greater reliance on outside cash flow to finance its short-term obligations than Scramouche Opera Company.

A current ratio of 1 indicates that the book value of the companys current assets is equal to the book value of its current liabilities.

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.

N&B Equipment Company has a better ability to meet its short-term liabilities than Scramouche Opera Company

An increase in the current ratio over time always means that the companys liquidity position is improving.