Liquidity ratio Josh Smith has compiled some of his personal financial data in o

Question

Liquidity ratio Josh Smith has compiled some of his personal financial data in order to determine his liquidity position. The data are as follows Account Amount Cash $3,270 980 760 1,250 1030 Marketable securities Checking account Credit card payables Short-term notes payable a. Calculate Josh's liquidity ratio. b. Several of Josh's friends have told him that they have liquidity ratios of about 16 How would you analyze Josh's liquidity relative to his triends? a.Josh Siquidity ratio is? (Round to two decimal places.) b Several of Josh's friends have told him that they have liquidity ratios of about 1.6. How would you analyze Josh's liquidity relative to his friends? (Select all the answers that apply) ? A. Josh's ratio indicates that he is in a relatively better position to satisfy his future short-term debt obigations as they come due B. Josh's ratio indicates that he is in a relatively inferior position to satisty his existing short-term debt obligations as they come due C. Since Josh's liquidity ratio exceeds 1.6, Josh has more liquidity than his triends ? D. Since Josh's liquidity ratio exceeds 1 6, Josh has less liquidity than his friends.

Explanation / Answer

Current Assets = Cash + Marketable securities + checking account = 3270+980+760 = 5010

Current Liabilities = Credit Card payables + Short-term notes payable = 1250 + 1030 = 2280

(a) Josh's Liquid ratio = Current ratio = current assets / current liabilities = 5010 / 2280 = 2.20

(b) Answer : A. Josh's ratio indicates that he is ina relatively better position to satisfy his future short-term debt obligations as they come due.

(This is because Josh's liquidity ratio is 2.20 which is better to his friends liquidity ratio of 1.60, which shows Josh is in better position to discharge his short-term obligations than his friends.)

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