Question

Virtual’s current ratio is1.33 and its quick ratio is 0.75 , whereas Gaia’s current ratio is1.66 , and its quick ratio is0.93 . Which of the following statements are true? Check all that apply. Gaia Group has a better ability to meet its short-term liabilities than Virtual Industriesnc. 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. If a company has a quick ratio of less than 1 but a current ratio of more than 1, and if the difference between the two ratios is large, it would mean that the company depends heavily on the sale of its inventory to meet its short-term obligations. As compared to Virtual Industriesnc., Gaia Group 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 accounts receivables will be collected late (after the expiration of the credit period) or are uncollectible The firm’s accounts receivables can be collected and converted into cash within the time period for which credit was granted 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

Answer 1

1)The options are below:
a)Gaia Group has a better ability to meet its short-term liabilities than Virtual Industries
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)If a company has a quick ratio of less than 1 but a current ratio of more than 1, and if the difference between the two ratios is large, it would mean that the company depends heavily on the sale of its inventory to meet its short-term obligations
d)As compared to Virtual Industriesnc., Gaia Group has lesser liquidity and relatively greater reliance on outside cash flow to finance its short-term obligations
e)An increase in the current ratio over time would always mean that the company’s liquidity position is improving

Option A is correct since the quick rato of gaja is higher than virtual
Option B is correct sinc ecurrent ratio means current assets divided by current liabilites
option C is correct since quick ratio= (current assets-inventory)/current liabilites
option D is incorrect since virtual industries having lower current ratio means lower liquidity
option E is incorrect as it can means that more old inventory it is holding and high account receivable which may not be good in long term

2)The firm’s accounts receivables can be collected and converted into cash within the time period for which credit was granted
the above option is correct