Question

2. Liquidity ratios

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

-Inventories

-Accounts receivable

The most recent data from the annual balance sheets of N&B Equipment Company and Scramouche Opera Company are as follows:

Balance Sheet December 31st31st (Millions of dollars)

	Scramouche Opera Company	N&B Equipment Company		Scramouche Opera Company	N&B Equipment Company
Assets			Liabilities
Current assets			Current liabilities
Cash	$574	$369	Accounts payable	$0	$0
Accounts receivable	210	135	Accruals	127	0
Inventories	616	396	Notes payable	717	675
Total current assets	$1,400	$900	Total current liabilities	$844	$675
Net fixed assets			Long-term bonds	1,031	825
Net plant and equipment	1,100	1,100	Total debt	$1,875	$1,500
			Common equity
			Common stock	$406	$325
			Retained earnings	219	175
			Total common equity	$625	$500
Total assets	$2,500	$2,000	Total liabilities and equity	$2,500	$2,000

N&B Equipment Company’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.

-Scramouche Opera Company has a better ability to meet its short-term liabilities than N&B Equipment Company.

-If a company’s current liabilities are increasing faster than its current assets, the company’s liquidity position is weakening.

-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, then the company depends heavily on the sale of its inventory to meet its short-term obligations.

-Compared to N&B Equipment Company, Scramouche Opera Company has less liquidity and a lower reliance on outside cash flow to finance its short-term obligations.

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

Answer 1