1. Liquidity ratios. Edison, Stagg, and Thornton have the following financial in
ID: 2357331 • Letter: 1
Question
1. Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10: Edison Stagg Thornton Cash $4,000 $2,500 $1,000 Short-term investments 3,000 2,500 2,000 Accounts receivable 2,000 2,500 3,000 Inventory 1,000 2,500 4,000 Prepaid expenses 800 800 800 Accounts payable 200 200 200 Notes payable: short-term 3,100 3,100 3,100 Accrued payables 300 300 300 Long-term liabilities 3,800 3,800 3,800 a. Compute the current and quick ratios for each of the three companies. (Round calculations to two decimal places.) Which firm is the most liquid? Why? b. Suppose Thornton is using FIFO for inventory valuation and Edison is using LIFO. Comment on the comparability of information between these two companies. c. If all short-term notes payable are due on July 11 at 8 a.m., comment on each company's ability to settle its obligation in a timely manner.Explanation / Answer
Edison Stagg Thorntom Assets:Cash $4,000.00 $2,500.00 $1,000.00 Acc/R $2,000.00 $25,000.00 $3,000.00 Inventory $1,000.00 $2,500.00 $4,000.00 Short term investment $3,000.00 $2,500.00 $2,000.00 Prepaid Expenses $800.00 $800.00 $800.00 Liabilities Acc/P $200.00 $200.00 $200.00 N/P Short Term $3,100.00 $3,100.00 $3,100.00 Accrued Payable $300.00 $300.00 $300.00 Sub Total $3,600 $3,600 $3,600 Long term liabilities $3,800.00 $3,800.00 $3,800.00 A: Edison Stagg Thorntom Current Ratios 3.00 L 9.25 3.00 F Quick Ratios 1.11 0.69 0.28 From the given data we find that the Stagg has the highest Current ratio, though he is not with the highest quick ratio. Still, Stagg is the most liquid because he has the highest current ratio that is 9.25, it means that he has $9.25 to pay against the debt of $1. B: the inventory level for Thornton is $ 4000 where as the same for Edison is $ 1000. it can be said the high value of the inventory in the Thornton is due to the high cost of the latest inventory purchased because only the first bought inventory has been sold that has resulted in the cash and receivables generation. however Edison's sales are made up of the latest inventory bought, so the high cost product has been sold, therefore only low cost inventory is left in the account. overall the difference does not make any difference if the Current ratio is used as it will consider inventory as well as cash and receivables, but the firms they not be compared if the quick ratio is used as it will consider only the cash. C: Each party has the same short term liabilities, that makes up of total $3,600. if we look upon the cash at the close of 10 July, only Edison has sufficient amount to settle its debts on the early morning 11 July, where as Stagg would be short of funds by $ 1100 (3600-2500) and Thorontom will be short of cash by $2600 (3600-1000).
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