Week 5

Week Five Exercise Assignment
Financial Ratios
1. Liquidity ratios. Edison, Stagg, and Thornton have the following financial information at the close of business on July 10:

Edison
Stagg
Thornton
Cash
$6,000
$5,000
$4,000
Short-term investments
3,000
2,500
2,000
Accounts receivable
2,000
2,500
3,000
Inventory
1,000
2,500
4,000
Prepaid expenses
800
800
800
Accounts payable
200
200
200
Notes payable: short-term
3,100
3,100
3,100
Accrued payables
300
300
300
Long-term liabilities
3,800
3,800
3,800
a. Compute the current and quick ratios for each of the three companies. (Round calculations to two decimal places.) Which firm is the most liquid? Why?
Account
Edison Stagg Thornton
Cash
6,000.00 5,000.00 4,000.00
Short term investments 3,000.00 2,500.00 2,000.00
Accounts receivable 2,000.00 2,500.00 3,000.00
Inventory
1,000.00 2,500.00 4,000.00
Prepaid Expense 800.00 800.00 800.00
Total Current Assets: 12,800.00 13,300.00 13,800.00

Account Edison Stagg Thornton
Accounts payable 200.00 200.00 200.00
Notes payable 3,100.00 3,100.00 3,100.00
Accrued payables 300.00 300.00 300.00
Total Current Liabilities: 3,600.00 3,600.00 3,600.00

Edison:

Current ratio - 12,800.00 / 3,600.00 = 3.56

Quick ratio - (6,000 + 3,000 + 2,000) =3.06

Stagg:

Current ratio - 13,300.00 / 3,600.00 =3.69

Quick ratio - (5,000.00 + 2,500.00 + 2,500.00)/ 3,600.00 = 2.78

Thornton:

Current ratio - 13,800.00 / 3,600.00 = 3.83

Quick ratio - (4,000.00 + 2,000.00 + 3,000.00) / 3,600 =2.5

The most liquid company is Edison because they have the most access if necessary.

2. Computation and evaluation of activity ratios.