2. Liquidity ratios A liquid asset can be converted to cash quickly without sign
ID: 2813166 • Letter: 2
Question
2. Liquidity ratios A liquid asset can be converted to cash quickly without significantly impacting the asset's value Which of the following asset classes is generally considered to be the most liquid? Aa Aa O Accounts receivable O Inventories O Cash The most recent data from the annual balance sheets of N&B Equipment Company and Scramouche Opera Company are as follows: Balance Sheet December 31st (Millions of dollars) Scramouche Opera Company N&B Equipment Company Scramouche Opera Company N&B Equipment Company Assets Liabilities Current liabilities Current assets $1,476Accounts payable $0 Cash Accounts receivable Inventories $2,296 840 2,464 5,600 540 Accruals 1,584 Notes payable 3,600 Total current liabilities 506 2,869 3,375 4,125 7,500 2,700 2,700 3,300 6,000 Total current assets Net fixed assets Net plant and equipment Long-term bonds 4,400 4,400 Total debt Common equity Common stock Retained earnings 1,625 875 2,500 10,000 1,300 700 2,000 8,000 Total common equity Total liabilities and equity Total assets 10,000 8,000 N&B Equipment Company's quick ratio is , and its current ratio is Scramouche opera Company's quick ratio is , and its current ratio is 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 N&B Equipment Company 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 KI An increase in the quick ratio over time usually means that the company's liquidity position is improving and that the company is managing its short-term assets well Compared to N&B Equipment Company, Scramouche opera Company has less liquidity and a lower reliance on outside cash flow to finanoe its short-term obligations An increase in the current ratio over time always means that the company's liquidity position is improving.Explanation / Answer
Obviously, cash is considered to be most liquid. Between inventory and account receivables, we need to see what is the receivable turnover and inventory turnover to come to conclusion about the liquidity.
NBB
Quick ratio = (Current assets - inventory) / current liabilities
Quick ratio = (3600 - 1584) / 2700 = 0.746
Current ratio = Current assets / current liabilities
Current ratio = 3600 / 2700 = 1.33
Scramouche
Quick ratio = (Current assets - inventory) / current liabilities
Quick ratio = (5600 - 2464) / 3375 = 0.929
Current ratio = Current assets / current liabilities
Current ratio = 5600 / 3375 = 1.66
Scramouche current ratio and quick ratio is higher than NBB so they can meet its short term liabilities better than NBB
Current ratio 1 means that current assets = current liabilities
Only these two options are true
Increase in current ratio can be misleasding because it is possible that account receivables are increasing which is not good sign for company
Increase in quick ratio can be beacuse inventory is decreasing, this means that company may not be able to fulfill a bulk order received unexpectedly
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