Question

 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?

•  Cash

•  Accounts receivable

•  Inventories

 The most recent data from the annual balance sheets of N&B Equipment Company and Jing Foodstuffs Corporation are as follows:

 N&B Equipment Company's current ratio is _______ , and its quick ratio is _______  ; Jing Foodstuffs Corporation's current ratio is

_______  , and its quick ratio is _______ . Note: Round your values to four decimal places.

 Which of the following statements are true? Check all that apply.

•  Jing Foodstuffs Corporation has a better ability to meet its short-term liabilities than N&B Equipment Company.

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

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

•  Compared to N&B Equipment Company, Jing Foodstuffs Corporation has less liquidity and a lower reliance on outside cash flow to finance its short-term obligations.

•  An increase in the current ratio over time always means that the company's liquidity position is improving.

Answer 1

Answer a.

Cash is the most liquid asset.

Answer b.

Jing Foodstuffs Corporation:

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $1,400 / $844
Current Ratio = 1.6588

Quick Ratio = (Current Assets - Inventories) / Current Liabilities
Quick Ratio = ($1,400 - $616) / $844
Quick Ratio = 0.9289

N&B Equipment Company:

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $900 / $675
Current Ratio = 1.3333

Quick Ratio = (Current Assets - Inventories) / Current Liabilities
Quick Ratio = ($900 - $396) / $675
Quick Ratio = 0.7467

N&B Equipment Company’s current ratio is 1.3333, and its quick ratio is 0.7467; Jung Foodstuffs Corporation’s current ratio is 1.6588, and its quick ratio is 0.9289.

Answer c.

Jing Foodstuffs Corporation has a better ability to meet its short-term liabilities than N&B Equipment Company.
If a company’s current liabilities are increasing faster than its current assets, the company’s liquidity position is weakening.
An increase in the quick ratio over time usually means that the company’s liquidity position is improving and that the company is managing its short-term assets well.