Question

In: Accounting

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

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.

Solutions

Expert Solution

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.

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