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                                        $3,200
Marketable securities                 1,000
Checking account                         800
Credit card payables                1,200
Short-term notes payable              900

a. Calculate Josh’s liquidity ratio.
b. Several of Josh’s friends have told him that they have liquidity ratios of about 1.8. How would you analyze Josh’s liquidity relative to his friends?

Explanation / Answer

current ratio =Current asset /current liabiliites

                 = (3200 +1000 +800) / (1200+900)

                  = 5000 / 2100

                = 2.38 :1

b)Josh liquidity ratio is higher than his friends it means josh has more liquid asset than his friend (readily convertible in cash)

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