Please Show All work Current Position Analysis Sherwood, Inc., had the following

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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 $3,141 2,231 7,093 2,493 831 332 7,870 $3,107 5,770 5,917 2,492 922 3,528 7,192 a. Determine the (1) current ratio and (2) quick ratio for both years. Round to one decimal place Year 2 Year 1 Current ratio 1.52X Quick ratio b. What conclusion can be drawn from these data? Sherwood's liquidity position has improved during the period. V

Explanation / Answer

Question -a

Quick ratio = Quick asset / Current liabilities

Quick assets = Current assets not including Inventory and Prepaid expenses

Question - b

Both current ratio and quick ratio improved during the year - 2.

Current ratio nearest to 2 : 1 is considered to be in par with standards and a quick ratio of 1:1 is best.

So comparision actual ratio with these standards indicate, current ratio the measure of liquidity is at about the required standards by year -2. It seems that firm is having good control over inventory and prepaid expenditure since we can observe above average ratio for quick assets.

Year - 2 Year - 1 Current assets Cash 3141 3107 Short term investments 2231 5770 Accounts receivables 7093 5917 Inventories 2493 2492 Prepaid expenses 831 922 Total current assets 15789 18208 Current liability Short obligations 332 3528 Accounts payable 7870 7192 Total current liability 8202 10720 Current ratio = CA / CL 1.9 1.7

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