EXERCISE 

1–3:  Evaluating Short­Term Liquidity
Mixon Company’s year-end balance sheets show the following:

Required:

Compare the year-end short-term liquidity position of this company at the end of
2006, 2005, and 2004 by computing the: (a) current ratio and (b) acid-test ratio.
Comment on the ratio results.

Solutions

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 Analysis and Interpretation: Mixon's short-term liquidity position has weakened over this
two-year period. Both the current and acid-test ratios show declining trends. Although we
do not have information about the nature of the company's business, the acid-test ratio
shift from ‘1.7 to 1’ down to ‘0.9 to 1’ and the current ratio shift from ‘2.9 to 1’ down to
‘1.9 to 1’ indicate a potential liquidity problem. Still, we must recognize that industry
standards may show that the 2004 ratios were too high (instead of 2006 ratios as too low).

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