Liquidity Ratios

1. Most firms borrow money to finance some of their assets, & most will choose to borrow some long & short term funds. Which group of lenders would put greater emphasis on a firms liquidity ratio when evaluating a potential borrower?

• Long term lenders
• Short term lenders

2. the most recent data from the annual balance sheets of Gaia Group & Oceanic Inc. are given for the year ending on Dec 31 (Millions of Dollars)

	Gaia	Oceanic		Gaia	Oceanic
Assets			Liabilities & Eq
Current assets:			Current liabilities:
Cash	4,592	2,952	Accts payable	0	0
Acct rec.	1,680	1,080	Accruals	1,013	0
Inventories	4,928	3,168	Notes payable	5,737	5,400
Total current assets	11,200	7,200	Total current liabilities	6,750	5,400
Net fixed assets:			Long term bonds	8,250	6,600
Net plant/equip	8,800	8,800	Total debt	15,000	12,000
			Common equity:
			Common stock	3,250	2,600
			Retained earnings	1,750	1,400
			Total common equity	5,000	4,000
Total assets	20,000	16,000	Total liabilities & equity	20,000	16,000

3. Oceanics current ratio is ___A___ & its quick ratio is ___B___, whereas Gaias current ratio is ___C___, & its quick ratio is ___D___

• A options are: 1.83, 2.83, 1.33 or 2.53
• B options are: 0.75, 0.90, 0.93 or 1.13
• C options are: 3.16, 2.16, 1.66 or 2.86
• D options are: 0.93, 1.12, 0.75 or 1.40

4. One of the most important assumptions behind the calculation of quick ratio is that:

• The firms account receivables will be collected late (after the expiration of the credit period) or are uncollectible
• The firms account receivables can be collected & converted into cash within the time period for which credit was granted
• The firms inventories are highly liquid & can be sold quickly with minimal loss of value to assist in the settlement of the firms financial obligations