Current Position Analysis Sherwood, Inc., had the following current assets and c

Question

Current Position Analysis Sherwood, Inc., had the following current assets and current liabilities at the end of two recent years: Year 2 Year 1 (in millions) (in millions) Cash and cash equivalents Short-term investments, at cost Accounts and notes receivable, net Inventories Prepaid expenses and other current assets Short-term obligations (liabilities) Accounts payable and other current liabilities $4,038 2,868 9,117 2,861 954 305 7,226 $4,170 7,743 7,942 3,814 1,411 3,240 6,604 a. Determine the (1) current ratio and (2) quick ratio for both years. Round to one decimal place. Year 2 Year 1 Current ratio Quick ratio b. What conclusion can be drawn from these data?

Explanation / Answer

a. Year 2 Year 1

Current ratio [Total current assets/ total current liabilities] $19838 / $7531 $25080 / $9844

= 2.6 = 2.5

Quick ratio [Total current assets- inventories / Total current liabilities] $16977/ $7531 $21266 / $9844

= 2.3 = 2.2      

Note:- 1). Total current assets = Cash and cash equivalent + Short term investments + Accounts and notes receivables + Inventories + prepaid expenses and other current assets

2). Total current liabilties = short term obligations and accounts payable and other liabilities

b.   Sherwood inc, has improved its current ratio and quick ratio, that means it has sufficient cash balance and quick assets to pay off its debt immediately without borrowing from outside

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