Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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

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

Accounts receivable

Cash

The most recent data from the annual balance sheets of Fitcom Corporation and Zebra Paper Corporation are as follows:

Balance Sheet December 31st31st (Millions of dollars)

Zebra Paper Corporation Fitcom Corporation Zebra Paper Corporation Fitcom Corporation
Assets Liabilities
Current assets Current liabilities
Cash $2,870 $1,845 Accounts payable $0 $0
Accounts receivable 1,050 675 Accruals 633 0
Inventories 3,080 1,980 Notes payable 3,586 3,375
Total current assets $7,000 $4,500 Total current liabilities $4,219 $3,375
Net fixed assets Long-term bonds 5,156 4,125
Net plant and equipment 5,500 5,500 Total debt $9,375 $7,500
Common equity
Common stock $2,031 $1,625
Retained earnings 1,094 875
Total common equity $3,125 $2,500
Total assets $12,500 $10,000 Total liabilities and equity $12,500 $10,000

Fitcom Corporations current ratio is , and its quick ratio is ; Zebra Paper Corporations current ratio is , and its quick ratio is . Note: Round your values to four decimal places.

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

Fitcom Corporation has less liquidity but also a greater reliance on outside cash flow to finance its short-term obligations than Zebra Paper Corporation.

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.

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.

Fitcom Corporation has a better ability to meet its short-term liabilities than Zebra Paper Corporation.

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

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Project Financing Financial Instruments And Risk Management

Authors: Frank J Fabozzi, Carmel De Nahlik

1st Edition

9811231494, 9789811231490

More Books

Students also viewed these Finance questions