A. Other things being equal, which company appears to have the better liquidity position in terms of their ability to pay short-term debts as they come due as measured by the current ratio? B. Which company appears to offer the better liquidity position in terms of their ability to pay short-term debts as they come due as measured by the acid-test or quick ratio? C. Other things being equal, which company appears to have the better liquidity position in terms of ability of the company’s current liabilities to be covered using its cash and cash equivalents?
A. Other things being equal, which company appears to have the better liquidity position in terms of their ability to pay short-term debts as they come due as measured by the current ratio? B. Which company appears to offer the better liquidity position in terms of their ability to pay short-term debts as they come due as measured by the acid-test or quick ratio? C. Other things being equal, which company appears to have the better liquidity position in terms of ability of the company’s current liabilities to be covered using its cash and cash equivalents?
Chapter5: Evaluating Operating And Financial Performance
Section: Chapter Questions
Problem 2EP
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A. Other things being equal, which company appears to have the better liquidity position in terms of their ability to pay short-term debts as they come due as measured by the
B. Which company appears to offer the better liquidity position in terms of their ability to pay short-term debts as they come due as measured by the acid-test or quick ratio?
C. Other things being equal, which company appears to have the better liquidity position in terms of ability of the company’s current liabilities to be covered using its cash and cash equivalents?
D. Which company appears to offer the better security for its current obligation creditors as measured by the current liabilities to net worth ratio?
Transcribed Image Text:## Liquidity Ratios Analysis – Year: 2021
### Overview
This visual representation displays the liquidity ratios for two companies, Big Store and Discount Goods, for the year 2021. Liquidity ratios provide a measure of a company's ability to cover its short-term obligations with its short-term assets. The specific ratios illustrated here include the Current Ratio, Cash Ratio, Current Liability to Net Worth, and Quick Ratio.
### Graphical Details and Explanation
#### 1. Current Ratio
The Current Ratio is a liquidity ratio that measures a company's ability to pay short-term obligations with its current assets.
- Big Store: The current ratio is just below 1.0, indicating that the company's current assets are almost equal to its current liabilities.
- Discount Goods: The current ratio is 1.5, suggesting that the company's current assets are higher than its current liabilities by 50%.
#### 2. Cash Ratio
The Cash Ratio is a more stringent liquidity ratio that measures the amount of cash and cash equivalents to cover short-term liabilities.
- Big Store: The cash ratio is approximately 0.03, signifying a very low proportion of cash and cash equivalents relative to their current liabilities.
- Discount Goods: The cash ratio is slightly higher at around 0.14, indicating a better but still low cash position compared to current liabilities.
#### 3. Current Liability to Net Worth
This ratio indicates the proportion of a company's current liabilities to its net worth, reflecting how much of the company's worth is tied up in short-term debts.
- Big Store: The ratio is 0.6938, which suggests that approximately 69.38% of the company's net worth is in current liabilities.
- Discount Goods: The ratio is higher at 1.1316, indicating that current liabilities exceed the company's net worth by 13.16%, pointing to a significant leverage.
#### 4. Quick Ratio
The Quick Ratio, or Acid Test Ratio, measures a company's capability to meet its short-term obligations with its most liquid assets, excluding inventory.
- Big Store: The quick ratio is approximately 0.3, indicating limited liquidity in terms of quick assets.
- Discount Goods: The quick ratio is around 0.7, demonstrating a better liquidity position than Big Store but still below the ideal ratio of 1.0.
### Conclusion
The visualization effectively highlights the liquidity positions of Big Store and Discount Goods for the year 2021. It reveals that while Discount
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