Question
3. An analyst is comparing liquidity ratios for the following two companies. The analyst concludes that company 1 has higher liquidity than company 2 because
| 3. An analyst is comparing liquidity ratios for the following two companies. The analyst concludes that company 1 has higher liquidity than company 2 because company 1 has a higher current ratio and because company 2 has very little cash on the balance sheet. | |||||
| Company 1 | |||||
| Cash | 70 | Payables | 240 | ||
| Inventory | 250 | Short term debt | 150 | ||
| Receivables | 140 | ||||
| Company 2 | |||||
| Cash | 20 | Payables | 240 | ||
| Inventory | 120 | Short term debt | 150 | ||
| Receivables | 250 | ||||
Is the analyst correct ?
What other variables do you need to consider in order to draw this conclusion ?
Step by Step Solution
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Detailed Explanation The analysts conclusion is based on comparing the liquidity ratios particularly the current ratio of two companies The current ratio is calculated by dividing a companys current a...
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Financial Accounting Tools for Business Decision Making
Authors: Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso, Barbara Trenholm, Wayne Irvine
7th Canadian edition
1119368456, 978-1119211587, 1119211581, 978-1119320623, 978-1119368458
