The following amounts were reported by Liquid Company in its most recent balance sheet:
Cash…………………………………………….$ 40,000
Accounts receivable……………………………. 130,000
Short-term investments………………………… 18,000
Inventory………………………………………. 390,000
Prepaid insurance……………………………… 35,000
Capital assets (net) ……………………………. 960,000
Accounts payable……………………………… 85,000
Wages payable………………………………… 37,000
Income tax payable……………………………. 45,000
Sales tax payable………………………………. 10,000
Short-term notes payable……………………… 90,000
Five-year bank loan……………………………. 50,000
Required:
a. Calculate the current ratio and quick ratio for Liquid Company.
b. Based on a review of other companies in its industry, the management of Liquid Company thinks it should maintain a current ratio of 2.2 or more, and a quick ratio of 0.9 or more. Its current and quick ratios at the end of the prior year were 2.1 and 0.8, respectively. How successful has the company been in achieving the desired results this year?
c. How could the company improve its current position? What risks, if any, may be associated with the strategy you have suggested?