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

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