Question

The most recent data from the annual balance sheets of Pellegrini Southern Corporation and Jing Foodstuffs Corporation are as follows:
Balance Sheet December 31st (Millions of dollars)
Jing Foodstuffs Pellegrini Southern Jing Foodstuffs Pellegrini Southern
Corporation Corporation Corporation Corporation
Assets Liabilities
Current assets Current liabilities
Cash $4,879 $3,136 Accounts payable $0 $0
Accounts receivable 1,785 1,148 Accruals 1,076 0
Inventories 5,236 3,366 Notes payable 6,096 5,737
Total current assets $11,900 $7,650 Total current liabilities $7,172 $5,737
Net fixed assets Long-term bonds 8,765 7,013
Net plant and equipment 9,350 9,350 Total debt $15,937 $12,750
Common equity
Common stock $3,453 $2,763
Retained earnings 1,860 1,487
Total common equity $5,313 $4,250
Total assets $21,250 $17,000 Total liabilities $21,250 $17,000
and equity
Pellegrini Southern Corporation’s current ratio is___, and its quick ratio is___; Jing Foodstuffs 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?
a. Pellegrini Southern Corporation has less liquidity but also a greater reliance on outside cash flow to finance its short-term obligations than Jing Foodstuffs Corporation.
b. If a company’s current liabilities are increasing faster than its current assets, the company’s liquidity position is weakening.
c. 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.
d. Pellegrini Southern Corporation has a better ability to meet its short-term liabilities than Jing Foodstuffs Corporation.
e. An increase in the current ratio over time always means that the company’s liquidity position is improving.

Answer 1

Answer:

Pellegrini Southern Corporation and Jing Foodstuffs Corporation

1. Pellegrini Southern Corporation’s current ratio is_1.3334__, and its quick ratio is_0.7467__; Jing Foodstuffs Corporation’s current ratio is_1.6592__, and its quick ratio is_0.9292__.

2. The true statements are:

a. Pellegrini Southern Corporation has less liquidity but also a greater reliance on outside cash flow to finance its short-term obligations than Jing Foodstuffs Corporation.

b. If a company’s current liabilities are increasing faster than its current assets, the company’s liquidity position is weakening.

e. An increase in the current ratio over time always means that the company’s liquidity position is improving.

Explanation:

a) Data and Calculations:

Balance Sheet December 31st (Millions of dollars)

                                    Jing     Pellegrini                              Jing    Pellegrini

                           Foodstuffs   Southern                     Foodstuffs  Southern  

Assets                                                    Liabilities

Current assets                                       Current liabilities

Cash                           $4,879 $3,136  Accounts payable              $0         $0

Accounts receivable     1,785    1,148  Accruals                         1,076            0

Inventories                   5,236  3,366  Notes payable              6,096    5,737

Total current assets $11,900 $7,650 Total current liabilities $7,172  $5,737

Net fixed assets                                   Long-term bonds         8,765     7,013

Net plant/equipment  9,350  9,350  Total debt                  $15,937 $12,750

                                                            Common equity

                                                            Common stock         $3,453   $2,763

                                                            Retained earnings       1,860      1,487

                                                           Total common equity $5,313  $4,250

Total assets         $21,250 $17,000  Liabilities/Equity       $21,250 $17,000

                                  Jing    Pellegrini

                       Foodstuffs    Southern

Current Ratio:    1.6592       1.3334 (Current assets/Current liabilities)

Quick Ratio       0.9292      0.7467 (Current assets-Inventory/Current Liabilities)