Liquidity ratios. Edison, Stagg, and Thornton have the following financial infor

Question

Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10: Compote the current and quick ratios for each of the three companies. (Round calculations to two decimal places.) Which firm is the most liquid? Why? Suppose Thornton is using FIFO for inventory valuation and Edison is using LIFO. Comment on the comparability of information between these two companies. 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

Current ratio = Current assets /Current liabilities Quick ratio = (Current assets - Inventories)/Current liabilities CA = Cash + ST Inv + AR+Inv CL = AP + ST NP + Accrued Payable CR of Edi = (4000+3000+2000+1000)/(200+3100+300) = 10000/3600= 2.78 QR of Edi = (10000-1000)/3600 = 2.50 CR of Stagg = (2500+2500+2500+2500)/(200+3100+300) = 10000/3600 = 2.78 QR of Stagg = (10000-2500)/3600 = 2.08 CR of Tho = (1000+2000+3000+4000)/(200+3100+300) = 10000/3600 = 2.78 QR of Thorn = (10000-4000)/3600 = 1.67 SO we see that Edison is most liquid as it has highest QR .....Ans ( a) The inventory method a company uses affects its costs of goods sold, or COGS, which has an impact on its profitability ratios. The formula for COGS is beginning inventory plus purchases less ending inventory. A company using FIFO to value its inventory reports lower COGS, which increases its gross profit margin (sales less COGS) and its net income all else being equal. Higher net income means higher profit margin. A company using LIFO reports higher COGS, translating into lower gross profit, net income and profit margins. This means earnings per share (net income divided by equity shares outstanding) is higher using FIFO all else being equal. So Thornton will show Higher profits using FIFO ...........An ( b) As Edison has highers QR, It will be easy for it to repay the ST Note. It will be most difficult for Thorno as it has lowest QR ................Ans (c)

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