A liquid asset can be converted quickly to cash with little sacrifice in its val
ID: 2615266 • Letter: A
Question
A liquid asset can be converted quickly to cash with little sacrifice in its value Which of the following asset classes is generally considered to be the least liquid? Accounts receivable O Cash O Inventories The most recent data from the annual balance sheets of Free Spirit Industries Inc. and LeBron Sports Equipment Inc. are as follows: Balance Sheet December 31st (Millions of dollars) LeBron Sports Equipment Inc Free Spirit Industries Inc LeBron Sports Equipment Inc Free Spirit Industries Inc Liabilities Current liabilities Assets Current asset $574 210 616 1,400 $369Accounts payable $0 127 $0 Cash Accounts receivable Inventories 135 Accruals 396 900 Total current liabilities 675 675 825 1,500 Notes payable Total current assets Net fixed assets Net plant and equipment 844 1,031 1,875 Long-term bonds 1,100 1,100 Total debt Common equity Common stock 406 325Explanation / Answer
1. Free Spirit Industries Inc
Quick Ratio = (Current Assets - Inventories ) / Current Liabilities
= ($900 - $396) / $675
= $504 / $675
= 0.75 Times
Current Ratio = Current Assets / Current Liabilities
= $900 / $675
= 1.33 Times
2. Lebron Sports Equipment Inc
Quick Ratio = (Current Assets - Inventories ) / Current Liabilities
= ($1400 - $616) / $844
= $784 / $844
= 0.89 Times
Current Ratio = Current Assets / Current Liabilities
= $1400 / $844
= 1.66 Times
Statements holding true
a. Lebron Sports Equipment Inc has a better ability to meet its short - term liabilities than Free Spirit Industries Inc
(because the quick as well as current ratio of Lebron Sports Equipment Inc is better than that of Free Spirit Industries Inc)
b. A current ratio of 1 indicates that the book value of company's current assets is equal to the book value of its current liabilities.
c.If a company has a quick ratio of less than 1 but a current ratio of more than 1 and 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.
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