Answer :
To analyze XYZ Company's liquidity based on the given information, let’s break down the problem step-by-step:
1. Quick Assets Analysis (Acid-Test Ratio):
- Total quick assets = \[tex]$30,000 - Total current liabilities = \$[/tex]22,000
The acid-test ratio is calculated using the formula:
[tex]\[ \text{Acid-test ratio} = \frac{\text{Total quick assets}}{\text{Total current liabilities}} \][/tex]
[tex]\[ \text{Acid-test ratio} = \frac{30,000}{22,000} = 1.36 \][/tex]
We also know:
- XYZ Company's acid-test ratio = 1.36
- Industry acid-test ratio = 0.70
From this, we can see:
- Sufficiency of quick assets: Since the acid-test ratio of XYZ Company (1.36) is greater than 1, XYZ Company has sufficient quick assets to pay off its short-term debt if needed.
- Comparison with industry: Since the acid-test ratio of XYZ Company (1.36) is greater than the industry average (0.70), XYZ Company is more liquid than other companies in the industry based on this measure.
2. Current Assets Analysis (Current Ratio):
- Total current assets = \[tex]$40,000 - Total current liabilities = \$[/tex]22,000
The current ratio is calculated using the formula:
[tex]\[ \text{Current ratio} = \frac{\text{Total current assets}}{\text{Total current liabilities}} \][/tex]
[tex]\[ \text{Current ratio} = \frac{40,000}{22,000} \approx 1.82 \][/tex]
We also know:
- XYZ Company's current ratio = 1.82
- Industry current ratio = 1.65
From this, we can see:
- Sufficiency of current assets: Since the current ratio of XYZ Company (1.82) is greater than 1, XYZ Company has sufficient current assets to pay off its short-term liabilities.
- Comparison with industry: Since the current ratio of XYZ Company (1.82) is greater than the industry average (1.65), XYZ Company is more liquid than other companies in the industry based on this measure.
Based on the analysis, the correct statements about XYZ Company's liquidity are:
- They have sufficient quick assets to pay off short-term debt if needed. (True)
- They are more liquid than others in their industry. (True)
Thus, the other statements:
- They don't have sufficient liquid assets to pay off short-term debt if needed. (False)
- They are less liquid than others in their industry. (False)
In conclusion, XYZ Company is in a strong liquidity position both in terms of their quick assets and current assets compared to their industry benchmarks. They have enough quick and current assets to cover their short-term liabilities and are more liquid than the industry average.
1. Quick Assets Analysis (Acid-Test Ratio):
- Total quick assets = \[tex]$30,000 - Total current liabilities = \$[/tex]22,000
The acid-test ratio is calculated using the formula:
[tex]\[ \text{Acid-test ratio} = \frac{\text{Total quick assets}}{\text{Total current liabilities}} \][/tex]
[tex]\[ \text{Acid-test ratio} = \frac{30,000}{22,000} = 1.36 \][/tex]
We also know:
- XYZ Company's acid-test ratio = 1.36
- Industry acid-test ratio = 0.70
From this, we can see:
- Sufficiency of quick assets: Since the acid-test ratio of XYZ Company (1.36) is greater than 1, XYZ Company has sufficient quick assets to pay off its short-term debt if needed.
- Comparison with industry: Since the acid-test ratio of XYZ Company (1.36) is greater than the industry average (0.70), XYZ Company is more liquid than other companies in the industry based on this measure.
2. Current Assets Analysis (Current Ratio):
- Total current assets = \[tex]$40,000 - Total current liabilities = \$[/tex]22,000
The current ratio is calculated using the formula:
[tex]\[ \text{Current ratio} = \frac{\text{Total current assets}}{\text{Total current liabilities}} \][/tex]
[tex]\[ \text{Current ratio} = \frac{40,000}{22,000} \approx 1.82 \][/tex]
We also know:
- XYZ Company's current ratio = 1.82
- Industry current ratio = 1.65
From this, we can see:
- Sufficiency of current assets: Since the current ratio of XYZ Company (1.82) is greater than 1, XYZ Company has sufficient current assets to pay off its short-term liabilities.
- Comparison with industry: Since the current ratio of XYZ Company (1.82) is greater than the industry average (1.65), XYZ Company is more liquid than other companies in the industry based on this measure.
Based on the analysis, the correct statements about XYZ Company's liquidity are:
- They have sufficient quick assets to pay off short-term debt if needed. (True)
- They are more liquid than others in their industry. (True)
Thus, the other statements:
- They don't have sufficient liquid assets to pay off short-term debt if needed. (False)
- They are less liquid than others in their industry. (False)
In conclusion, XYZ Company is in a strong liquidity position both in terms of their quick assets and current assets compared to their industry benchmarks. They have enough quick and current assets to cover their short-term liabilities and are more liquid than the industry average.
