Company A has total assets of $125,000 and current assets of $25,000. Their cash

Question

Company A has total assets of $125,000 and current assets of $25,000. Their cash and receivables were $15,000 in sum and they had no marketable securities. Company A has current liabilities of $15,000. Company B has total assets of $115,000 and current assets of $35,000. Their cash, marketable securities, and receivables were $20,000 in sum. Company B has current liabilities of $10,000. Which of the following is true regarding the liquidity of these two companies? OA. The current ratio, but not the quick ratio, indicates Company B is more liquid. OB. The current ratio, but not the quick ratio, indicates Company A is more liquic. OC. Both the current and quick ratio indicate that Company B is the most liquid. D. Both the current and quick ratio indicate that Company A is the most liquid.

Explanation / Answer

C.Both the current and quick ratio indicate that company B is the most liquid.

current ratio = current assets / current liabilities

quick ratio = (cash + marketable securities + receivables) / current liabilities

since, company B,s current ratio and quick ratio is higher than that of company A, we can say that company B is most liquid.

company A company B current ratio (25,000/15,000) =>1.67 (35,000/10,000)=>3.50 quick ratio (15,000/15,000)=>1.0 (20,000/10,000)=>2.0

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