Question
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.
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