Question

Problem 8-9B Calculate and analyze ratios (LO8-6)

Selected financial data regarding current assets and current liabilities for Ferris Air and Oceanic Airlines are provided as follows:

    

($ in millions)	Ferris Air						Oceanic Airlines
Current assets:
Cash and cash equivalents		$	1,113					$	2,791
Current investments			1,857						958
Net receivables			578						2,156
Inventory			469						1,023
Other current assets			210						1,344
Total current assets		$	4,227					$	8,272
Current liabilities:
Current debt		$	271					$	1,627
Accounts payable			2,209						5,686
Other current liabilities			2,170						5,957
Total current liabilities		$	4,650					$	13,270

Required:

1-a. Calculate the current ratio for Ferris Air and Oceanic Airlines. (Enter your answers in millions. For example, $5,500,000 should be entered as 5.5.)

   

Current Ratio	Ferris Air			Oceanic Airlines
		=	0		=	0

-b. Which Airlines has the better current ratio?
   multiple choice 1

• Ferris Air

• Oceanic Airlines

  
2-a. Calculate the acid-test (quick) ratio for Ferris Air and Oceanic Airlines. (Enter your answers in millions. For example, $5,500,000 should be entered as 5.5.)

Acid-Test Ratio	Ferris Air			Oceanic Airlines
		=	0		=	0

2-b. Which Airlines has the better acid-test ratio?
   multiple choice 2

• Ferris Air

• Oceanic Airlines

Answer 1

1.a. Current ratio = Current assets / Current liabilities

Ferris Air = 0.909 Oceanic Airlines = 0.623

Calculation:

Airlines	Total current assets (in mllions)	Total current liabilities (in millions)	Current ratio
Ferris Air	$4,227	$4,650	$4,227 / $4,650 = 0.909
Oceanic Airlines	$8,272	$13,270	$8,272 / $13,270 = 0.623

1.b. Ferris Air

Ferris Air has a better current ratio. It's current ratio is higher than the Oceanic Airlines. A higher current ratio indicates a higher capability to pay the company's obligations.

2.a Acid-Test(quick) ratio = (Current assets - inventory) / Current liabilities

Ferris Air = 0.808 Oceanic Airlines = 0.546

Calculation:(all amounts are in millions)

Airline	Total current assets	Inventory	Total current liabilities	Acid - Test ratio (current assets - inventory) / Current liabilities
Ferris Air	$4,227	$469	$4,650	($4,227 - $469) / $4,650 = 0.808
Oceanic Airlines	$8,272	$1,023	$13,270	($8,272 - $1,023) / $13,270 = 0.546

2.b. Ferris Air

Ferris Air has a higher acid - test ratio compared to Oceanic Airlines. So, Ferric Air's acid - test ratio is better. It indicates that Ferric Air is more financially stable than Oceanic Airlines