Balance Sheet (Millions of dollars) Fitcom ramouche Scramouche Fitcom Opera Corp

Question

Balance Sheet (Millions of dollars) Fitcom ramouche Scramouche Fitcom Opera Corporation Company Opera Corporation Company Assets Liabilities Current assets Current liabilities Cash Accounts receivable Inventories $4,592 1,680 4,928 11,200 $2,952Accounts payable $0 1,013 5,737 6,750 8,250 15,000 1,080 Accruals 3,168 Notes payable 7,200 Total current liabilities Total current assets Net fixed assets Net plant and equipment 5,400 5,400 6,600 12,000 Long-term bonds 8,800 8,800 Total debt Common equity 3,250 1,750 5,000 20,000 2,600 1,400 4,000 16,000 Common stock Retained earnings Total common equity Total liabilities and equity Total assets 20,000 16,000 Fitcom Corporation's current ratio is 1.3333 and its quick ratio is 0.7467Scramouche Opera Company's current ratio is 1.6593, and its quick ratio is 0.9292 . Note: Round your values to four decimal places. Which of the following statements are true? Check all that apply Scramouche Opera Company has a better ability to meet its short-term liabilities than Fitcom Corporation. If a company's current liabilities are increasing faster than its current assets, the company's liquidity position is weakening If a company has a quick ratio of less than 1 but a current ratio of more than 1 and if the difference between the two ratios is large, then the company depends heavily on the sale of its inventory to meet its short-term obligations. Compared to Fitcom Corporation, Scramouche Opera Company has less liquidity and a lower reliance on outside cash flow to finance its short-term obligations. An increase in the current ratio over time always means that the company's liquidity position is improving. rlash Playe WIN 31,0,0,108 03 3.34.1 200-2016 Apla. All rights reserved 2013 Cengage Leaming cocopt as noted Al nghts reserved. Grade It Now Save & Continue Continue without saving

Explanation / Answer

Current ratio of Fitcom Corporation = 7200/5400 = 1.3333 Quick ratio of Fitcom = (2952+1080)/5400 = 0.7467 Current ratio of Scramouche Opera = 11200/6750 = 1.6593 Quick ratio of Scramouche Opera = (4592+1680)/5400 = 1.1615 TRUE STATEMENTS: *Scramouche opera had a better ability………………………………. Reason: Its current ratio and acid test ratio are higher. *If a company's current liabilities are increasing faster……… As the denominator of the ratio is increasing at a faster rate the ratio will go down, indicating weakening of the firm's liquidity position. *If a company has a quick ratio of less than 1……………. Inventory is included in the numerator of the current ratio but excluded from the numerator of the quick ratio. As the current ratio is very high when compared to the quick ratio, it could be only due to the largeness of the size of the inventory. Last two statements are not correct. Fitcom has higher liquidity. Increase in current ratio does not always mean increase in liquidity. The reason is that, the inventory might be very high and/or the receivables could be high with overdue accounts.

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