Question

Assignment 04 - Analysis of Financial Statements The most recent data from the annual balance sheets of Fitcom Corporation and Scramouche Opera Company are as follows: Balance Sheet December 31st (Millions of dollars) Fitcom Corporation Scramouche Opera Company Scramouche Opera Company Fitcom Corporation $0 Assets Current assets Cash Accounts receivable Inventories Total current assets $3,731 1,365 4,004 9,100 $2,398 878 2,574 5,850 Liabilities Current liabilities Accounts payable Accruals Notes payable Total current liabilities $0 823 4,661 5,484 4,387 4,387 Net fixed assets Net plant and equipment 7,150 Long-term bonds Total debt 6,703 12,187 7,150 5,363 9,750 Common equity Common stock Retained earnings Total common equity Total liabilities and equity 2,641 1,422 4,063 16,250 2,113 1,137 3,250 13,000 Total assets 16,250 13,000 , and its current ratio is Fitcom Corporation's quick ratio is , and its current ratio is ; Scramouche Opera Company's quick ratio is

Answer 1

Scramouche Opera Company:

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $9,100 / $5,484
Current Ratio = 1.66

Quick Ratio = (Current Assets - Inventories) / Current Liabilities
Quick Ratio = ($9,100 - $4,004) / $5,484
Quick Ratio = 0.93

Fitcom Corporation:

Current Ratio = Current Assets / Current Liabilities
Current Ratio = $5,850 / $4,387
Current Ratio = 1.33

Quick Ratio = (Current Assets - Inventories) / Current Liabilities
Quick Ratio = ($5,850 - $2,574) / $4,387
Quick Ratio = 0.75

Fitcom Corporation’s current ratio is 1.33, and its quick ratio is 0.75; Scramouche Opera Company’s current ratio is 1.66, and its quick ratio is 0.93.

Answer c.

Fitcom Corporation has less liquidity but also a greater reliance on outside cash flow to finance its short-term obligations than Scramouche Opera Company.
A current ratio of 1 indicates that the book value of the company’s current assets is equal to the book value of current liabilities.

Scramouche Opera Company has a better ability to meet its short-term liabilities than Fitcom Corporation.
If a company has a quick ratio of less than 1 but a current ratio of more than 1 and if 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.
An increase in the current ratio over time always means that the company’s liquidity position is improving.