Question

Selected data from Britt Company's financial statements are provided below.

	2014	2013	2012
Cash	$24 000	$17 000	$8 000
Accounts receivable	43 000	13 000	55 700
Inventory	27 000	73 000	40 000
Prepaid expenses	21 000	15 000	20 500
Total current assets	115 000	118 000	124 200
Total current liabilities	$62 000	$75 000
Net credit sales	231 000	322 000
Cost of goods sold	165 000	297 000
Net cash flows from operating activities	17 000	28 000

Which of the following statements is true regarding the company's liquidity?

		Based on the current ratio and operating cash flow ratio, the company appears to be in a worse position to pay its current obligations at the end of 2014 compared to 2013
		Based on the quick ratio, the company appears to be in a better position to pay its current obligations at the end of 2014 compared to 2013
		The quick ratio decreased from 2013 to 2014
		The operating cash flow ratio increased from 2013 to 2014

Answer 1

For 2013

Quick ratio = (Cash+Accounts receivable)/ Current liabilities

= (17,000+13,000)/75,000

= 30,000/75,000

= 0.4

For 2014

Quick ratio = (Cash+Accounts receivable)/ Current liabilities

= (24,000+43,000)/62,000

= 67,000/62,000

= 1.08

Quick ratio has increase in 2014 in comparison to 2013, which shows that the company appears to be in a better position to pay its current obligations at the end of 2014 compared to 2013.

Second option is correct option.

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