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?

Cash

Accounts receivable

Inventories

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.