Question

A liquid asset can be converted to cash quickly without significantly impacting the asset’s value.

Which of the following asset classes is generally considered to be the most liquid?

Cash

Accounts receivable

Inventories

The most recent data from the annual balance sheets of Fitcom Corporation and Scramouche Opera Company are as follows:

Balance Sheet December 31st (Millions of dollars)

	Scramouche Opera Company	Fitcom Corporation		Scramouche Opera Company	Fitcom Corporation
Assets			Liabilities
Current assets			Current liabilities
Cash	$1,435	$922	Accounts payable	$0	$0
Accounts receivable	525	338	Accruals	316	0
Inventories	1,540	990	Notes payable	1,793	1,687
Total current assets	$3,500	$2,250	Total current liabilities	$2,109	$1,687
Net fixed assets			Long-term bonds	2,578	2,063
Net plant and equipment	2,750	2,750	Total debt	$4,687	$3,750
			Common equity
			Common stock	$1,016	$813
			Retained earnings	547	437
			Total common equity	$1,563	$1,250
Total assets	$6,250	$5,000	Total liabilities and equity	$6,250	$5,000

Fitcom Corporation’s quick ratio is   , and its current ratio is   ; Scramouche Opera Company’s quick ratio is   , and its current ratio is   .

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

A.Fitcom Corporation has less liquidity but also a greater reliance on outside cash flow to finance its short-term obligations than Scramouche Opera Company.

B.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.

C.An increase in the quick ratio over time usually means that the company’s liquidity position is improving and that the company is managing its short-term assets well.

D.Fitcom Corporation has a better ability to meet its short-term liabilities than Scramouche Opera Company.

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

Answer 1

			Scramouche Opera Company		Fitcom Corporation
Current ratio	total of current assets/total of current liabilities	3500/2109	1.66	2250/1687	1.33
total of current assets			3500		2250
total of current liabilities			2109		1687
Quick ratio	total of quick assets/total of current liabilities	1960/2109	0.93	1260/1687	0.75
total of quick assets		3500-1540	1960	2250-990	1260
total of current liabilities			2109		1687
statement which are true	A, B & C	Yes Fitcom liquidity ratios are poor in comparison to Scramouche corp. as its current ratio and quick ratio are less and all the financing of working capital of fitcom is from notes payable only. A current ratio of 1 indicates that total of current assets are equal to total of current liabilities. yes an increasing quick ratio results in improving short term liqudity position over the period.
Statement which are false	D & E	No fitcom is not having better ability to meet out its current liability as indicated from current and quick ratio.no an increase in current ratio does not always means improvement in liquidity position as it can results in over investment in working capital.