The most recent data from the annual balance sheets of Free
Spirit Industries Corporation and LeBron Sports Equipment
Corporation are as follows:
Balance Sheet December 31st31st (Millions of
dollars)
| LeBron Sports Equipment Corporation | Free Spirit Industries Corporation | LeBron Sports Equipment Corporation | Free Spirit Industries Corporation | ||
| Assets | Liabilities | ||||
| Current assets | Current liabilities | ||||
| Cash | $861 | $553 | Accounts payable | $0 | $0 |
| Accounts receivable | 315 | 203 | Accruals | 190 | 0 |
| Inventories | 924 | 594 | Notes payable | 1,075 | 1,012 |
| Total current assets | $2,100 | $1,350 | Total current liabilities | $1,265 | $1,012 |
| Net fixed assets | Long-term bonds | 1,547 | 1,238 | ||
| Net plant and equipment | 1,650 | 1,650 | Total debt | $2,812 | $2,250 |
| Common equity | |||||
| Common stock | $610 | $488 | |||
| Retained earnings | 328 | 262 | |||
| Total common equity | $938 | $750 | |||
| Total assets | $3,750 | $3,000 | Total liabilities and equity | $3,750 | $3,000 |
Free Spirit Industries Corporation’s quick ratio is
, and its current ratio is ; LeBron
Sports Equipment Corporation’s quick ratio is ,
and its current ratio is .
Which of the following statements are true? Check all
that apply.
Free Spirit Industries Corporation has less liquidity but also a
greater reliance on outside cash flow to finance its short-term
obligations than LeBron Sports Equipment Corporation.
A current ratio of 1 indicates that the book value of the
company’s current assets is equal to the book value of its current
liabilities.
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.
Free Spirit Industries Corporation has a better ability to meet
its short-term liabilities than LeBron Sports Equipment
Corporation.
An increase in the current ratio over time always means that the
company’s liquidity position is improving.
