Answer:
1. Jong Foodstuffs Inc. has a better ability to meet its short-term liabilities that Free Spirit. - TRUE
2. 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. - TRUE
3. 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. - TRUE
4. Compared to Free Spirit, Jong Foodstuffs has less liquidity and a lower reliance on outside cash flow to finance its short-term obligations. FALSE
5. An increase in the current ratio over time always means that the company’s liquidity position is improving. FALSE
Explanation:
Current Ratio = Current Asset / Current Liabilities
Quick Ratio = (Current Assets – Inventories) / Current Liabilities
The Current Ratio is a liquidity measure that shows the ratio between current asset and current liabilities. It tells how many dollars of the current asset are per dollar of current debts, that gives an idea of the company`s ability to perform its debts.
The Quick Ratio is also a liquidity indicator, but using its most liquid assets, to pay its current liabilities at maturity. The inventory, although it is a current asset, is not considered, since it cannot be converted into cash in a very short term.
The difference between the Quick Ratio and the Current Ratio, implies that while both are measures of the company's ability to pay its debts, the quick ratio also tells how much the company depends on its inventory to get that objective.
As both ratios are bigger in Jong Foodstuffs Inc.’s case, statement 1 is True and statement 4 is False. Because how ratios are calculated, and the meaning of its terms, statement 2 and 3 are True. And because an increased in current ratio, may implicate a rise in inventory, and therefore a decreased in quick ratio, statement 4 is False.
