December 31 Assets 2020 2019 Cash $ 9,000 $ 12,000 Accounts receivable 80,000 48,000 Equipment 32,000 ...

December 31

Assets	2020	2019
Cash	$ 9,000	$ 12,000
Accounts receivable	80,000	48,000
Equipment	32,000	20,000
Less: Accumulated depreciation	(10,000)	( 5,000)
Total	$111,000	$ 75 ,000

Liabilities and Shareholders' Equity

Accounts payable	$ 20,000	$ 15,000
Note Payable due in 4 years	12,000	0
Common shares	50,000	50,000
Retained earnings	29 ,000	1 0,000
Total	$111,000	$ 75 ,000

a)comment on this company's liquidity. (answer with one word only)

b)what ratio did you use to answer the previous question about liquidity? (1 word, 2 words or 3 words. spelling counts)

Solutions

Expert Solution

Requirement a:-

In order to understand the liquidity of the company, calculate the company's current ratio:-

a.) Current Ratio = Current Assets/ Current Liabilities

Particulars	2020 Balance	2019 Balance
Cash	9,000	12,000
Accounts Receivable	80,000	48,000
	89,000	60,000

Accounts Payable	20,000	15,000

Current Ratio	4.45	4.00

Liquidity of the company is the ability of the company to pay its obligations as they come due. A company with a higher liquidity will be able to meet its short term obligations with its available resources without much difficulty. A higher liquidity is always a positive factor for any company.

As can be observed from the above calculation, the company's liquidity has improved from 2019 to 2020. The company's current assets are approx 4 times its current liabilities which means the company has a good liquidity ratio.

Requirement b:-

The Ratio that i had used to comment about the Liquidity is Current Ratio. Current ratio is a measure of current assets to current liabilities. It helps a user of the data to understand the number of times the company's current liabilities are worth the current assets to pay its obligations as they come due.

Please let me know if you have any questions via comments and all the best :)

ekkarill92 answered 1 year ago

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