Chapter 2 Assignment Most firms borrow money to finance some of their assets, and most will choose to borrow some long-term funds and some short-term funds. Which group of lenders would put greater emphasis on a firm's liquidity ratio when evaluating a potential borrower? Long-term lenders O Short-term lenders The most recent data from the annual balance sheets of Gaia Group and Vallante Corporation. are given. Balance Sheet For the Year Ending on December 31 (Millions of dollars) Gaia Vallante Gaia Vallante Assets Liabilities & Equity Current liabilities: Current assets: Cash Accounts receivable Inventories 3,157 2,029.5 Accounts payable 1,155 742.5 Accruals 3,388 2,178Notes payable 696.0937 3,944.5312 3,712.5 7,700 4,950 Total current liabilities 4,640.6253,712.5 5,671.875 4,537.5 10,312.5 8,250 Total current assets Net fixed assets Long-term bonds Total debt Common equity Net plant and equipment 6,050 6,050 2,234.375 1,787.5 1,203.125 962. Common stock Retained earnings Total common equity 3,437.5 2,750 The most recent data from the annual balance sheets of Gaia Group and Vallante Corporation. are given. Balance Sheet For the Year Ending on December 31 (Millions of dollars) Gaia Vallante Gaia Vallante Assets Liabilities & Equity Current assets: Current liabilities: Cash Accounts receivable Inventories 3,157 2,029.5Accounts payable 1,155 742.5Accruals 3,3882,178Notes payable 7,700 4,950 Total current liabilities 0 696.0937 3,944.5312 3,712.5 4,640.625 3,712.5 5,671.875 4,537.5 10,312.5 8,250 0 Total current assets Net fixed assets: Net plant and equipment Long-term bonds Total debt Common equity 6,050 6,050 Common stock 2,234.375 1,787.5 1,203.125 Retained earnings 962.5 2,750 11000 Total common equity 3,437.5 Total assets 13,750 11000 Total liabilities and equity 13,750 Vallante's current ratio is and its quick ratio is whereas Gaia's current ratio is and its quick ratio is Which of the following statements are true? Check all that apply. Gaia Group has a better ability to meet its short-term liabilities than Vallante Corporation. OA current ratio of 1 indicates that the book value of the company's 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, it would mean that the company depends heavily on the sale of its inventory to meet its short-term obligations As compared to Valiante Corporation, Gaia Group has lesser liquidity and relatively greater reliance on outside cash flow to finance its short-term obligations. An increase in the current ratio over time would always mean that the company's liquidity position is improving. One of the most important assumptions behind the calculation of quick ratio is that The firm's inventories are highly liquid and can be sold quickly with minimal loss of value to assist in the settiement of the firm's financial obligations The firm's accounts receivables can be collected and converted into cash within the time period for which credit was granted The firm's accounts receivables will be collected late (after the expiration of the credit period) or are uncollectible
