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The most recent data from the annual balance sheets of East India Inc. (EII) and Volition...

The most recent data from the annual balance sheets of East India Inc. (EII) and Volition Corporation. are given.

Balance Sheet For the Year Ending on December 31 (Millions of dollars)

EII

Volition

EII

Volition
Assets Liabilities & Equity
Current assets: Current liabilities:
Cash 287 184.5 Accounts payable 0 0
Accounts receivable 105 67.5 Accruals 63.2813 0
Inventories 308 198 Notes payable 358.5938 337.5
Total current assets 700 450 Total current liabilities 421.875 337.5
Net fixed assets: Long-term bonds 515.625 412.5
Net plant and equipment 550 550 Total debt 937.5 750
Common equity
Common stock 203.125 162.5
Retained earnings 109.375 87.5
Total common equity 312.5 250
Total assets 1,250 1000 Total liabilities and equity 1,250 1000

Volition’s current ratio is    and its quick ratio is   , whereas EII’s current ratio is   , and its quick ratio is   .

Which of the following statements are true? Check all that apply.

East India Inc. (EII) has a better ability to meet its short-term liabilities than Volition Corporation.

A 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.

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

As compared to Volition Corporation., East India Inc. (EII) 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 settlement 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

Solutions

Expert Solution

Ratio Formula EII Volition
Current Assets Current assets / Current liabilities 700 / 421.875 1.66 450 / 337.5 1.33
Quick Ratio (Current assets - inventories)/ Current liabilities (700 - 308) / 421.875 0.93 (450 - 198) / 337.5 0.75
East India Inc. (EII) has a better ability to meet its short-term liabilities than Volition Corporation. TRUE
A 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. TRUE
An increase in the quick ratio over time usually means that the company’s liquidity position is improving. TRUE
As compared to Volition Corporation., East India Inc. (EII) has lesser liquidity and relatively greater reliance on outside cash flow to finance its short-term obligations. FALSE
An increase in the current ratio over time would always mean that the company’s liquidity position is improving. FALSE

For the last part

The firm’s accounts receivables can be collected and converted into cash within the time period for which credit was granted

ekkarill92 answered 2 years ago
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