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Date Posted: 13:17:37 02/08/03 Sat
Author: Dr. D.
Subject: Problem Set # 22

Many of you have had questions on how to proceed for problem 22 of the problem set due on Monday.
Here's a hint (in the form of an example):

Assume that the Current Ratio for a firm is 4.0 and the quick ratio is 2.5.

What causes the difference?
A: the only difference between the two is that the CR contains Inventory and the QR does not. So, in the above case, must be 1.5 times current liabilities. Alternately, Current Assets must be 4/1.5 times inventory. This means that, given inventory, you can solve for current liabilities and/or current assets.

If you don't see this, use the following numbers to verify:
CL = $100, Inventory = $150, Cash = $200, AR = $50.

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