Attempts: 2. Liquidity ratios A liquid asset can be converted to cash quickly wi

Question

Attempts: 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? Do No Harm: /10 () Cash O Accounts receivable O Inventories The most recent data from the annual balance sheets of Free Spinit Industries Inc. and Scramouche Opera Company are as folle Balance Sheet December 31st (Millions of dollars) Scramouche Free Spirit Opera Industries Scramouche Free Spirit OperaIndustries Company Inc. Company Inc. Liabilities Assets Current liabilities so $2,870 1:050 3,080 $1,845 Aounts payable Cash Accounts receivable Inventorie 675 Accruals 1.980 Notes payable 3,586

Explanation / Answer

The following statements are true :

1. Saramouche Opera Company has a better ability to meet its short-term liabilities than Free Spirit Industries Inc.

Reason: Because Saramouche Opera Company has more amount of cash and cash equivalents ( Accounts Receivable )

2. If a company’s current liabilities are increasing faster than its current assets, the company’s liquidity position is weakening.

Reason: As the liabilities payable by company increases when the cash and cash equivalents are not available, its ability to generate cash decreases.

3. An increase in the quick ration over time usually means that the company’s liquidity position is improving and that the company is managing its short-term assets well.

Reason : improvement in liquidity ratio means improvement in ability to pay so it also means god management of short term assets well.

Remaining 2 options are false.

Please do provide feedback as to whether the answer is satisfactory or not.

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