Please answer both questions. If answers are clear and correct I will leave posi
ID: 1172265 • Letter: P
Question
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The most recent data from the annual balance sheets of N&B; Equipment Company and Zebra Paper Corp. are as follows: Balance Sheet December 31st (Millions of dollars) Zebra Paper Corp N&B; Equipment Company Zebra Paper Corp N&B; Equipment Company Assets Current assets Liabilities Current liabilities $1,435 525 1,540 3,500 $0 316 1,793 2,109 2,578 4,687 $0 Cash Accounts receivable Inventories $922 338 990 2,250 Accounts payable Accruals Notes payable 1,687 1,687 2,063 3,750 Total current liabilities Total current assets Net fixed assets Net plant and equipment Long-term bonds 2,750 2,750 Total debt Common equity Common stock 1,016 547 1,563 6,250 813 437 1,250 5,000 Retained earnings Total common equity Total assets 6,250 5,000 Total iabilities and equity N&B; Equipment Company's current ratio is , and its quick ratio is Zebra Paper Corp.'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 Zebra Paper Corp. 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, Zebra Paper Corp. 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 improvingExplanation / Answer
By ratio analysis methodologies
Current Ratio = Total Current Assets/Total Current Liabilities
Quick Ratio = (Total Current Assets - Inventories)/Total Current Liabilities
For N&B Equipment,
Current ratio = (2250/1687) = 1.3337
Quick ratio = (2250 - 990)/1687 = 0.7469
For Zebra Paper Corp,
Current ratio = (3500/2109) = 1.6596
Quick ratio = (3500 - 1540)/2109 = 0.9293
Correct Statements: Statement 1, Statement 2, Statement 3
Higher quick ratio generally indicates better ability to meet short-term liabilities. Zebra Corp (as calculation above shows) has higher quick ratio. Hence statement 1 is correct
Increase in current liabilities at a faster rate than current assets indicate weakending liquidity position. Company will have less current assets to service its current liabilities, and may have to liquidate long term assets to service those liabilities in grave conditions. So statement 2 is correct.
Increase in quick ratio over time indicates strengthening liquidity position of company.So statement 3 is correct.
Based on quick ratio, Zebra Corp has better liquidity so statement 4 is incorrect.
An increase in current ratio may also be due to pile up of inventories (if they become obsolete) since inventories are a part of current assets. Obsolete inventories may sit on company's balance sheet and might have to ultimately be written off and book a loss. So increase in current ratio may not always indicate stronger liquidity. Hence, statement 5 is incorrect.