Current Position Analysis Sherwood, Inc., the parent company of Tasty snack foods and Super beverages, had...

Current Position Analysis

Sherwood, Inc., the parent company of Tasty snack foods and Super beverages, had the following current assets and current liabilities at the end of two recent years:

Current Year
(in millions) Previous Year
(in millions)
Cash and cash equivalents $5,228 $5,451
Short-term investments, at cost 3,714 10,123
Accounts and notes receivable, net 11,804 10,382
Inventories 1,353 1,805
Prepaid expenses and other current assets 451 667
Short-term obligations 361 3,832
Accounts payable 8,659 8,528

a. Determine the (1) current ratio and (2) quick ratio for both years. Round to one decimal place.

Current Year Previous Year
1. Current ratio
2. Quick ratio

b. The liquidity of Sherwood has increased some over this time period. Both the current and quick ratios have increased . Sherwood is a strong company with ample resources for meeting short-term obligations. Its liquidity as measured by the current and quick ratios has improved during this period.

Solutions

Expert Solution

Ans- a-1-Computation of Current assets and Current liabilities:-

	Current Year	Previous Year
Current Assets:
Cash and cash equivalent	$5,228	$5,451
Short-term investments	3,714	10,123
Accounts receivables	11,804	10,382
Inventories	1,353	1,805
Prepaid expenses and other current assets	451	667
Total Current assets	22,550	28,428

Current Liability:
Short -term obligations	361	3,832
Accounts Payable	8,659	8,528
Total current liability	9,020	12,360

Current Ratio= Current Assets/ Current Liabilities

Current year= $22,550/ $9,020

=2.5

Previous year= $28,428/ $12,360

=2.3

Ans-a-2- Computation of Quick Assets and Current Liabilities

	Current Year	Previous Year
Quick Assets:
Cash and cash equivalent	$5,228	$5,451
Short-term investments	3,714	10,123
Accounts receivables	11,804	10,382
Total Quick assets	20,746	25,956

Current Liability:
Short -term obligations	361	3,832
Accounts Payable	8,659	8,528
Total current liability	9,020	12,360

Quick assets= Current assets not including Inventory and Prepaid expenses.

Quick Ratio= Quick Assets/ Current Liabilities

Current Year= $20,746/ $9,020

=2.3

Previous Year= $25,956/ $12,360

=2.1

Ans-b- Both current ratio and quick ratio improved during the current year (year-2).

Current ratio 2:1 is considered to be in par with standards and a quick ratio of 1: 1 is best.

So comparison actual ratio with these standards indicate, current ratio the measure of liquidity is at above the required standard. It seems that firm is having good control over inventory and prepaid expenditure.

ekkarill92 answered 1 year ago

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