1. Liquidity ratios Aa Aa Most firms borrow money to finance some of their asset
ID: 2812561 • Letter: 1
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1. Liquidity ratios Aa Aa Most firms borrow money to finance some of their assets, and most will choose to borrow some long-term funds and some short-term funds. Which group of lenders would put greater emphasis on a firm's liquidity ratio when evaluating a potential borrower? Short-term lenders O Long-term lenders The most recent data from the annual balance sheets of N&B Equipment Company and LeBron Sports Equipment Inc. are as follows Balance Sheet December 31st (Millions of dollars) LeBron N&B LeBron N&B Sports Equipment Sports Equipment Equipment Company Equipment Company Inc Inc Liabilities Current liabilities Assets Current assets $0 Cash Accounts receivable Inventories $4,592 1,680 4,928 11,200 $2,952 Accounts payable $0 1,013 5,737 6,750 8,250 15,000 1,080 3,168 7,200 Accruals Notes payable Total current assets Net fixed assets Net plant and equipment 5,400 5,400 6,600 12,000 Total current liabilities Long-term bonds 8,800 8,800 Total debt Common equity Common stock 3,250 1,750 5,000 20,000 2,600 1,400 4,000 16,000 Retained earnings Total common equity Total liabilities and equity Total assets 20,000 16,000 N&B Equipment Company's quick ratio is , and its current ratio is ; LeBron Sports Equipment Inc.'s quick ratio is and its current ratio is Which of the following statements are true? Check all that apply N&B Equipment Company has less liquidity but also a greater reliance on outside cash flow to finance its short-term obligations than LeBron Sports Equipment Inc.. A current ratio of 1 indicates that the book value of the company's current assets is equal to the book value of its current liabilities 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 N&B Equipment Company has a better ability to meet its short-term liabilities than LeBron Sports Equipment Inc. An increase in the current ratio over time always means that the company's liquidity position is improvingExplanation / Answer
N&B Equipment Company
Quick Ratio = (Cash + A/c Receivables)/ (Current Liabilities)
= (2952+1080)/5400
=0.747
Current Ratio = Current Asset/ Current Liabilities
= 7200/5400
= 1.33
For Lebron Sports Equipment,
Quick ratio = (4592+1680)/6750 = 0.93
Current Ratio = 11200/6750 = 1.66
Statement 1 : False
The current ratio is less but greater than 1. So the company need not depend on outside financing
Statement 2: True
Statement 3 : True ( current ratio numerator has inventory as additional to quick ratio numerator, so more cash is tied up in inventory)
Statement 4 : False
Liquidity ratio of Lebron is higher which means it has more capacity to meet short term obligations
Statement 5 : False
A higher current ratio can also mean that company is not able to collect receivables promptly or not able to sell its inventory
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