Assignment Exercise 11–1: Liquidity Ratios Refer to the Metropolis Health System

Question

Assignment Exercise 11–1: Liquidity Ratios Refer to the Metropolis Health System (MHS) case study in Chapter 28

Required:

1. Set up a worksheet for the liquidity ratios.

2. Compute the four liquidity ratios using the Chapter 28 MHS financial statements

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Metropolis Health System Statement of Cash Flows for the Year Ended March 31, 2 Statement of Cash Flows Operating Activities $1,700,000 Income from operations Adjustments to reconcile income from operations to net cash flows from operating activities Depreciation and amortization 1,950,000 Changes in asset and liability accounts Patient accounts receivable Other receivables Inventories Prepaid expenses and other assets Accounts payable and accrued expenses Reduction of bond interest payable Estimated third-party payer settlements 250,000 (50,000) (50,000) (50,000) (400,000) (25,000) (75,000) 80,000 20,000 Interest income received Unrestricted gifts and memorials received Net cash flow from operating activities $3,350,000 Cash Flows from Capital and Related Financing Activities Repayment of long-term obligations (500,000) Cash Flows from Investing Activities Purchase of assets whose use is limited (100,000) Equipment purchases and building improvements Net Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents, Beginning of Year Cash and Cash Equivalents, End of Year (2,000,000) $750,000 400,000 $1,150,000

Explanation / Answer

Liquidity ratios show the cash level of a company and the ability to turn other assets into cash to pay off liabilities and other current obligations.

The most common liquidity ratios are:

1. Current ratio

2. Quick ratio

1. Current ratio: Total current assets / total current liabilities

in the above example, the current assets = 10,625,000

The current liabilites = 5,825,000

Cuurent ratio = 10625000/5825000 = 1.824

2. Quick ratio = (Total current assets - inventories - Prepaid expenses) / Current liabilities

Invesntories = 900000

Prepaid expenses = 200000

Quick ratio = (10625000 - 900000 - 200000) / 5825000 = 1.635

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