Owen Monie is attempting to categorize several items from his company's financial statements so he can...

Owen Monie is attempting to categorize several items from his company's financial statements so he can determine his working capital. Owen notices the following categories of accounts and amounts:
•cash $8,800
•accounts payable $17,250 •accounts receivable $22,100 •sales tax due city $3,125 •sales tax due the state department of revenue $1,500 •inventory $26,500
•wages payable $7,100
•taxes payable (federal) $5,000 •money market fund $18,750
which statement best describes Owen's liquidity ratios?
check all that apply
•this company is sufficiently liquid, his current ratio is above the general rule of 2.0 or higher.
•His company is not sufficiently liquid. Owen will have a difficult time meeting his current obligations
•for every dollar of short-term creditors claims, he has more than $2 to pay for those current obligations
•Owen quick ratio is below the general rule of one or higher indicating liquidity problems

Solutions

Expert Solution

Answer:

Only statement A and C are correct and are checked as follows:

Explanation:

Let us calculate current ratio:

Current assets = cash + money market fund + accounts receivable + inventory

= $8,800 + 18750 + 22100 + 26500

= $76,150

Current liabilities = Accounts payable + Sales tax due city + Sales tax due the state department of revenue + Wages payable + Taxes payable (federal)

=17250 + 3125 + 1500 + 7100 + 5000

= $33,975

Current ratio = 76150 / 33975 = 2.24

Current ratio is higher than 2. As such statement A and C are correct and statement B is incorrect.

Let us calculate quick ratio:

Quick assets = 8800 + 18750 + 22100 = $49,650

Quick ratio = 49650 / 33975 = 1.46

Quick ratio is much highet than 1 indicating no liquidity problems. As such statement D is incorrect.

jeff jeffy answered 1 year ago

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