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Analysis of Given Ratios

Analysis of Given Ratios. See attached file for full problem description.

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Answer: a)

Both, the current ratio and the acid-test (quick) ratio are what are known as liquidity ratios, which are indicators of a firm's ability to meet its short-term financial obligations.

The current ratio is the ratio of current assets to current liabilities:

Current Ratio = Current Assets / Current Liabilities

A high current ratio symbolizes that a company has most of its assets in liquid (readily convertible to cash) form. Short-term creditors prefer to deal with companies with a high current ratio since it reduces their risk. A low current ratio is a signal to company shareholders that the organization is effectively using its assets to grow the business.

An advantage of the quick ratio is that it does not include current inventory items (i.e., cash, accounts receivable, and notes receivable) in its determination of a firm's liquidity. The quick ratio often referred to as the "acid-test," is defined as follows:
Quick Ratio = (Current Assets - Inventory) / Current Liabilities)

If a firm's current ratio is increasing while the ...

Solution Summary

MS Word file which contains the meaning and use of many of the financial ratios that are used to determine the financial and operational condition of an organization.

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