Question

# Jacob Inc has the following:                                      &nb

Jacob Inc has the following:

2014                2015                2016

Total Assets                            100                  110                  120

Current Liabilities                    10                    10                    10

Current Ratio                           1                      2                      3

Quick Ratio                             1                      2                      3

Cash Ratio                               .5                     1.5                   2.5

Debt/Equity Ratio                    1                      1.2                   1.4

Assume current assets =  cash, receivables and cash.

Based on the above information, Jacob Inc has been able to increase its Current Ratio, Quick Ratio and Cash Ratio over the three years. Please explain how it was able to do so? In other words, what is driving the numbers?

It was able to  ______________________  its    __________________  and put it into  _____________________.

1. Increase, long-term debt,  cash
2. Increase, sales, receivables
3. Increase, long-term debt,  inventory
4. Decrease, long-term debt, cash
5. Decrease, short-term debt, cash
6. Increase, net income, inventory

Solution :

The Answer is (a) Increase, long-term debt, cash.

Explanation : If we analyse the ratios we can see that the companies Debt / Equity ratio is increasing from Year 2014 to 2016 continuously. The Increase debt equity ratio indicates the company has increased its debt over the years.

Further Companies Cash Ratio is Also increasing over the years. It means that companies cash reserve has increased. The Increase in Cash has also resulted in Increase in Current and Quick Ratio. Current Liabilities are same over the years and Inventories is not part of the current assets as given in question. Increase in Long term debts and Increase in Cash indicates that financing has been done from Long Term Debts and put it into Cash.

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