Question

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

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.

Answer 2

An increase in the quick ratio over time implies that the company’s most liquid assets have increased or that current liabilities have decreased. This means that the company will be able to pay off its short-term liabilities with its accounts receivable, cash, and equivalents, even if it has difficulty in liquidating its inventory. This indicates that the company’s liquidity position is improving.

An increase in the current ratio does not always mean an improvement in the company’s liquidity position. If a company’s current assets are increasing, it could indicate that the firm has too much old inventory that will have to be written off or too many old accounts receivable that may turn into bad debts. A very high current ratio could also signal that the firm is not managing its assets efficiently.