Question

The most recent data from the annual balance sheets of Pellegrini Southern Corporation and Jing Foodstuffs Corporation are as follows:

Balance Sheet December 31st (Millions of dollars)

	Jing Foodstuffs Corporation	Pellegrini Southern Corporation		Jing Foodstuffs Corporation	Pellegrini Southern Corporation
Assets			Liabilities
Current assets			Current liabilities
Cash	$4,879	$3,136	Accounts payable	$0	$0
Accounts receivable	1,785	1,148	Accruals	1,076	0
Inventories	5,236	3,366	Notes payable	6,096	5,737
Total current assets	$11,900	$7,650	Total current liabilities	$7,172	$5,737
Net fixed assets			Long-term bonds	8,765	7,013
Net plant and equipment	9,350	9,350	Total debt	$15,937	$12,750
			Common equity
			Common stock	$3,453	$2,763
			Retained earnings	1,860	1,487
			Total common equity	$5,313	$4,250
Total assets	$21,250	$17,000	Total liabilities and equity	$21,250	$17,000

Pellegrini Southern Corporation’s current ratio is___, and its quick ratio is___; Jing Foodstuffs Corporation’s 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.

Pellegrini Southern Corporation has less liquidity but also a greater reliance on outside cash flow to finance its short-term obligations than Jing Foodstuffs Corporation.

If a company’s current liabilities are increasing faster than its current assets, the company’s liquidity position is weakening.

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.

Pellegrini Southern Corporation has a better ability to meet its short-term liabilities than Jing Foodstuffs Corporation.

An increase in the current ratio over time always means that the company’s liquidity position is improving.

Answer 1

Current Ratio = Current Assets / Current Liabilities

Quick Ratio = (Current Assets - Inventories ) / Current Liabilities

Pellegrini Southern Corporation’s current ratio is 1.3334, and its quick ratio is 0.7467.

Jing Foodstuffs Corporation’s current ratio is 1.6592, and its quick ratio is 0.9292.

Statement 1 - Pellegrini Southern Corporation has less liquidity but also a greater reliance on outside cash flow to finance its short-term obligations than Jing Foodstuffs Corporation. - The statement is true

Statement 2 - If a company’s current liabilities are increasing faster than its current assets, the company’s liquidity position is weakening. - The statement is true because Numerator will grow at less rate than Denominator thus the Current Liability of a company will decrease.

Statement 3 - 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. - The statement is true

Statement 4 - Pellegrini Southern Corporation has a better ability to meet its short-term liabilities than Jing Foodstuffs Corporation. - The statement is false because it has less ratios than Jing Foodstuffs.

Statement 5 -  An increase in the current ratio over time always means that the company’s liquidity position is improving. - The statement is true