Question

In: Finance

Jacob Inc has the following: 2014       2015       2016 Total Assets           100 110  ...

Jacob Inc has the following:

2014       2015       2016

Total Assets           100 110       120

Current Liabilities     10 10       10

Current Ratio           1       2       3

Cash Ratio           .5       1.5       2.5

Debt/Equity Ratio       1       1.2       1.4


Caro Jo Inc has the following:

               2014       2015       2016

Total Assets           100       100       100

Current Liabilities       10       10       10

Current Ratio           1       1       1

Cash Ratio           .5       .5       .5

Debt/Equity Ratio       1       1       1


*Based on the above information*

-Jacob Inc has been able to increase its Current Ratio and Cash Ratio over the three years.

-Caro Jo’s Current Ratio and Cash Ratio have NOT increased,
over the same three years

Please Explain what is driving the numbers Listed Above.

NOTE explain in detail

Solutions

Expert Solution

Current ratio:

Formula for Current ratio:

Current ratio = Current assets / Current liabilities

Now look at the Total Assets of the Jacob Inc:

For the year 2014, Total Assets are 100

For the year 2015, Total Assets are 110

For the year 2016, Total Assets are 120

They are increasing year by year whereas Current Liabilities remain constant for the 3 years.

From the formula of the current ratio, we can know current assets are directly related to the current ratio and current liabilities are inversely related.

So, If there is an increase in current assets then the current ratio will increase and If there is a decrease in current assets then the current ratio will decrease. The reverse will happen in case of current liabilities.

Now look at the Total Assets of the CaroJo Inc:

The assets and liabilities remained same for all the 3 years.

By keeping the above points in mind,
We can observe that Jacob Inc has been able to increase its Current Ratio whereas CaroJo’s Current ratio has not increased.

Cash ratio:

The formula for Cash ratio:

Cash ratio = Cash and cash Equivalents / Current Liabilities

Current assets include cash and cash equivalents.
From the formula of Cash ratio, we can know cash and cash equivalents are directly related to cash ratio and current liabilities are inversely related.

So, If there is an increase in cash and cash equivalents then the cash ratio will increase and If there is a decrease in cash and cash equivalents then the cash ratio will decrease. The reverse will happen in case of current liabilities.

Total Assets of Jacob Inc are increasing year by year whereas Current Liabilities remain constant for the 3 years.

Now look at the Total Assets of the CaroJo Inc:
The assets and liabilities remained same for all the 3 years.

By keeping the above points in mind,
We can observe that Jacob Inc has been able to increase its Cash Ratio whereas CaroJo’s Cash ratio has not increased.

Thank you, please give an upvote

jeff jeffy answered 2 years ago
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