Question

Calculating Liquidity Ratios The balance sheets for Red Oak Inc. and Birch Co. reflect the following: Red Oak Birch Current assets Cash $ 17,500 $ 35,000 Short-term investments 10,500 0 Accounts receivable 87,500 123,000 Inventory 59,500 17,500 Other 17,500 21,000 Noncurrent assets 997,500 1,109,500 Total assets $1,190,000 $1,306,000 Current liabilities $ 105,000 $ 105,000 Long-term liabilities 105,000 805,000 Stockholders' equity 980,000 396,000 Total liabilities and stockholders' equity $1,190,000 $1,306,000 Calculate the following ratios and comment on the results. Note: Round amounts to two decimal places. For example, enter 3.16 for 3.1556. Ratio Red Oak Birch a. Current ratio 0 0 b. Quick ratio 0 0 Compared to Birch Company, Red Oak has a: Stronger • Liquidity position

Answer 1

Ratio	Red Oak	Birch
a. Current ratio	1.83	1.87
b. Quick ratio	1.10	1.50

Compared to Birch company, Red Oak has a Weaker liquidity position

Calculations:

	Red Oak	Birch
Current Assets:
Cash	$17,500	$35,000
Short-term investments	$10,500	$0
Accounts receivable	$87,500	$123,000
Inventory	$59,500	$17,500
Other	$17,500	$21,000
Total current assets	$192,500	$196,500
Quick assets:
Cash	$17,500	$35,000
Short-term investments	$10,500	$0
Accounts receivable	$87,500	$123,000
Total quick assets	$115,500	$158,000
Current liabilities	$105,000	$105,000
Current ratio	1.83	1.87
[Current assets/Current liabilities]
Quick ratio	1.10	1.50
[Quick assets/Current liabilities]