The following information is available for Flanders and its two main competitors in the industry, Sanders and Anders:?FlandersSandersAnders?Cash$ 9,800$10,500$26,500?Short-term investments6,4008,20012,500?Accounts receivable12,5008,50014,350?Merchandise inventory30,15040,00040,150?Prepaid expense9006,7502,450?Accounts payable19,40013,75026,800?Salaries payable1,2003,5006,250?Other current payables6001,2002,150??????The industry standard for the current ratio is 1.8 and the industry standard for the acid-test ratio is 1.Required:1. Calculate the current ratio and acid-test ratio for each firm.2. Rank the firms in decreasing order of liquidity.3. Comment on Flanders' relative liquidity position.

What will be an ideal response?

Part 1

Flanders

Sanders

Anders

Cash

$ 9,800

$10,500

$26,500

Short-term investments

6,400

8,200

12,500

Accounts receivable

12,500

8,500

14,350

Merchandise inventory

30,150

40,000

40,150

Prepaid expense

900

6,750

2,450

Total current assets

$59,750

$73,950

$95,950

Accounts payable

$19,400

$13,750

$26,800

Salaries payable

1,200

3,500

6,250

Other current payables

600

1,200

2,150

Total current liabilities

$21,200

$18,450

$35,200

Flanders

Sanders

Anders

Current ratio:

$59,750/21,200 =

2.82

$73,950/$18,450 =

4.01

$95,950/$35,200 =

2.73

Flanders

Sanders

Anders

Cash…………………………………

$ 9,800

$10,500

$26,500

Short-term investments……………

6,400

8,200

12,500

Accounts receivable…………………

12,500

8,500

14,350

Total quick assets…………………

$28,700

$27,200

$53,350

Flanders

Sanders

Anders

Acid-test ratio:

$28,700/$21,200 =

1.35

$27,200/$18,450 =

1.47

$53,350/$35,200 =

1.52

Part 2: Rank order:

Current ratio

Acid-test ratio

Sanders

4.01

Anders

1.52

Flanders

2.82

Sanders

1.47

Anders

2.73

Flanders

1.35

Industry average

1.80

Industry average

1.00

Part 3: Flanders' current ratio lags behind Sanders' but is ahead of both Anders and the industry average. Flanders' acid test ratio is behind both Anders and Sanders but is ahead of the industry average. Overall, Flanders appears reasonably strong on liquidity.

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