Garner\'s Platoon Mental Health Care, Inc. Balance Sheet for Years Ending Decemb

Question

Garner's Platoon Mental Health Care, Inc. Balance Sheet for Years Ending December 31, 2016 (In Millions) 2016 Current Assets Cash and Marketable Securities Accounts Receiavble Inventory 1,000 1,250 1,800 4,050 S Total Current Assets S s 8,000 1,000 s 7,000 Gross Plant and Equipment Net Plant and Equipment 400 7,400 Total Fixed Assets Total Assets s 11450 Curent Liabilities S 1,000 Accounts Payable Accrued Wages and Taxes Notes Payable 350 900 Total Current Liabilities S 2,250 5,000 Long-Term Debt s 7,250 Total Liabilities Common Stock (200 million shares) S 200 Total Shareholders' Equity Total Liabilities and Shareholders' Equity 11,450 S 4,000 S 4,200

Explanation / Answer

Here the ratio is 1 , that indicates that the company maintains high liquidity .

A. Quick Ratio or Acid-test ratio = current assets – inventories- prepayments / current liabilities Quick Ratio = $(4050-1800-0)/$2250 Quick Ratio = $2250/$2250 Quick Ratio = 1 Significance of quick ratio- Quick ratio is an indicator of most readily available current assets to pay off short-term obligations. It is useful in assessing liquidity situation of companies ,when they find it difficult to sell inventories.

Here the ratio is 1 , that indicates that the company maintains high liquidity .

B. CASH RATIO= (CASH + CASH EQUIVALENTS )/ CURRENT LIABILITIES CASH RATIO= (Cash & marketable securities + Accounts Receivable ) /( accounts payable + accrued wages & taxes + notes payable) CASH RATIO= $(1000+1250)/$(1000+350+900) CASH RATIO= $2250/$2250 CASH RATIO= 1 Significance of cash ratio- It measures the ability of a business to repay its current liabilities by only using its cash and cash equivalents only. Here the ratio is 1 , that means company's cash and other cash equivalents are perfectly equal to its current liabilities i.e its cash and cash equivalents are just enough to meet its current liabilities . * inventory is not a cash equivalent as its not highly liquid & cannot be sold at same price on emergency situations

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