Answer:
Free Spirit Industries Corporation and LeBron Sports Equipment Corporation
1a. Free Spirit Industries Corporation’s current ratio is , and its quick ratio is 1.3337 : 1 and 0.7469 : 1 respectively.
1b. LeBron Sports Equipment Corporation’s current ratio is , and its quick ratio is 1.6596 : 1 and 0.9294 : 1 respectively.
2. True: 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.
3. True: 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.
4. True: An increase in the current ratio over time always means that the company’s liquidity position is improving.
Explanation:
a) Data:
Balance Sheet December 31st (Millions of dollars)
LeBron Sports Equipment Corporation Free Spirit Industries Corporation
LeBron Free Spirit LeBron Free Spirit
Assets Liabilities
Current assets Current liabilities
Cash $1,435 $922 Accounts payable $0 $0
Accounts receivable 525 338 Accruals 316 0
Inventories 1,540 990 Notes payable 1,793 1,687
Total current assets $3,500 $2,250 Total current liabilities $2,109$1,687
Net fixed assets Long-term bond 2,578 2,063
Net plant & equipment 2,750 2,750 Total debt $4,687 $3,750
Common equity
Common stock $1,016 $813
Retained earnings 547 437
Total common equity $1,563 $1,250
Total assets $6,250 $5,000 Total liabilities and equity$6,250 $5,000
b) Current Ratio and Quick Ratio:
Current Ratio = Current Assets/Current Liabilities
Quick Ratio = (Current Assets - Inventory)/Current Liabilities
1a. Free Spirit Industries Corporation’s current ratio is , and its quick ratio is
Current Ratio = $2,250 / $1,687 = 1.3337 : 1
Quick Ratio = ($2,250 - 990) / $1,687 = 0.7469 : 1
1b. LeBron Sports Equipment Corporation’s current ratio is , and its quick ratio is:
Current Ratio = $3,500 / $2,109 = 1.6596 : 1
Quick Ratio = $3,500 -1,540 / $2,109 = 0.9294 : 1
