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solution

The most recent data from the annual balance sheets of Free
Spirit Industries Corporation and LeBron Sports Equipment
Corporation are as follows:

Balance Sheet December 31st31st (Millions of
dollars)

LeBron Sports Equipment Corporation Free Spirit Industries Corporation LeBron Sports Equipment Corporation Free Spirit Industries Corporation
Assets Liabilities
Current assets Current liabilities
Cash $861 $553 Accounts payable $0 $0
Accounts receivable 315 203 Accruals 190 0
Inventories 924 594 Notes payable 1,075 1,012
Total current assets $2,100 $1,350 Total current liabilities $1,265 $1,012
Net fixed assets Long-term bonds 1,547 1,238
Net plant and equipment 1,650 1,650 Total debt $2,812 $2,250
Common equity
Common stock $610 $488
Retained earnings 328 262
Total common equity $938 $750
Total assets $3,750 $3,000 Total liabilities and equity $3,750 $3,000

Free Spirit Industries Corporation’s quick ratio is
, and its current ratio is ; LeBron
Sports Equipment Corporation’s quick ratio is ,
and its current ratio is .

Which of the following statements are true? Check all
that apply.

Free Spirit Industries Corporation has less liquidity but also a
greater reliance on outside cash flow to finance its short-term
obligations than LeBron Sports Equipment Corporation.

A current ratio of 1 indicates that the book value of the
company’s current assets is equal to the book value of its current
liabilities.

If a company has a quick ratio of less than 1 but a current
ratio of more than 1 and if the difference between the two ratios
is large, then the company depends heavily on the sale of its
inventory to meet its short-term obligations.

Free Spirit Industries Corporation has a better ability to meet
its short-term liabilities than LeBron Sports Equipment
Corporation.

An increase in the current ratio over time always means that the
company’s liquidity position is improving.

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