Question

The most recent data from the annual balance sheets of Free Spirit Industries Corporation and LeBron Sports Equipment Corporation are as follows:
Balance Sheet December 31st31st (Millions of dollars)
LeBron Sports Equipment Corporation Free Spirit Industries Corporation LeBron Sports Equipment Corporation Free Spirit Industries Corporation
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 bonds 2,578 2,063
Net plant and 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
Free Spirit Industries Corporation’s current ratio is , and its quick ratio is ; LeBron Sports Equipment Corporation’s current ratio is , and its quick ratio is . Note: Round your values to four decimal places.
Which of the following statements are true? Check all that apply.
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.
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.
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.
Free Spirit Industries Corporation has a better ability to meet its short-term liabilities than LeBron Sports Equipment Corporation.
An increase in the current ratio over time always means that the company’s liquidity position is improving.

Answer 1

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