Homework Answers
Solution:
(a)
Current Ratio (Vallante)= Current assets/current liabilities = 7,200/5,400 = 1.33 times
Quick Ratio (Vallante)= (Current assets-inventories)/current liabilities = (7,200-3,168)/5,400 = 0.75 times
Current Ratio (Gaia)= Current assets/current liabilities = 11,200/6,750 = 1.66 times
Quick Ratio (Gaia)= (Current assets-inventories)/current liabilities = (11,200-4,928)/6,750 = 0.93 times
(b)
Gaia has a higher current ratio and quick ratio than Vallante, thus it has a better ability to meet its short-term liabilities than vallante.
If a company's current liabilities are increasing faster than current assets, it means that current ratio is falling and hence, the liquidity position is weakening
Quick assets are current assets excluding inventory. Inventories are excluded because they are not very liquid and reliable. If a company has a current ratio less than 1 but a significantly higher quick ratio, it thus means that the difference between the two ratios is because of inventories and that the company is heavily dependent on sale of its inventory to meet the short-term obligations.
Therefore, based on above all three statements are true.
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