Selected financial data regarding two competing airlines are provided as follows:($ in millions)Company ACompany BCurrent assets?? Cash and cash equivalents$1,225$4,684 Short-term investments3,1041,351 Net receivables8111,844 Inventory525388 Other current assets 270 637Total current assets$5,935$8,904Current liabilities?? Accounts payable$6,702$6,991 Short-term debt2,6722,407 Other current liabilities 1,624Total current liabilities$9,374$11,022Required:1. Calculate the current ratio for both companies. Which airline has the best current ratio?2. Calculate the acid-test (quick) ratio for both companies. Which airline has the best acid-test ratio?3. How would the purchase of additional inventory by issuing
short-term debt affect the current ratio? How would it affect the acid-test ratio?
What will be an ideal response?
Requirement 1
| ($ in millions) | Total Current Assets | ÷ | Total Current Liabilities | = | Current Ratio |
| Company A | $5,935 | ÷ | $9,374 | = | 0.63 (rounded) |
| Company B | $8,904 | ÷ | $11,022 | = | 0.81 (rounded) |
Requirement 2
| ($ in millions) | Quick Assets | ÷ | Total Current Liabilities | = | Acid-Test Ratio |
| Company A | $5,140 | ÷ | $9,374 | = | 0.55 (rounded) |
| Company B | $7,879 | ÷ | $11,022 | = | 0.71 (rounded) |
Requirement 3
The purchase of additional inventory by issuing short-term debt would increase the current ratio as both current assets and current liabilities would increase by an equal amount. The purchase of additional inventory by issuing short-term debt would decrease the acid-test ratio due to the increase in current liabilities in the denominator of the ratio. Recall that inventory is excluded in calculating the numerator for the acid-test ratio.
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