**Liquidity ratio**   Josh Smith has compiled some of his personal financial data in order to determine his liquidity position. The data are as​ follows:

**Account**

**Amount**

Cash

$ 3 comma 240$3,240

Marketable securities

1 comma 0201,020

Checking account

840840

Credit card payables

1 comma 1501,150

​Short-term notes payable

11701170

**a.** Calculate​ Josh's liquidity ratio.

**b**. 

Several of​ Josh's friends have told him that they have liquidity ratios of about 

1.61.6. 

How would you analyze​ Josh's liquidity relative to his​ friends?

Question content area bottom

Part 1

**a.**​ Josh's liquidity ratio is 

2.202.20.

 ​ (Round to two decimal​ places.)

Part 2

**b**. 

Several of​ Josh's friends have told him that they have liquidity ratios of about 

1.61.6. 

How would you analyze​ Josh's liquidity relative to his​ friends?  ​(Select all the answers that​ apply.)

A.

​Josh's ratio indicates that he is in a relatively better position to satisfy his future​ short-term debt obligations as they come due.

B.

​Josh's ratio indicates that he is in a relatively inferior position to satisfy his existing​ short-term debt obligations as they come due.

C.

Since​ Josh's liquidity ratio exceeds 

1.61.6​, 

Josh has less liquidity than his friends.

D.

Since​ Josh's liquidity ratio exceeds 

1.61.6​, 

Josh has more liquidity than his friends.




### Part 1: Calculation of Josh's Liquidity Ratio

The liquidity ratio is a measure of how well someone can meet their short-term obligations with their liquid assets. It is calculated as:

\[
\text{Liquidity Ratio} = \frac{\text{Liquid Assets}}{\text{Current Liabilities}}
\]

From the data provided:

- **Liquid Assets** include:
  - Cash: \$3,240
  - Marketable Securities: \$1,020
  - Checking Account: \$840

  Total Liquid Assets = $ 3,240 + 1,020 + 840 = 5,100 $

- **Current Liabilities** include:
  - Credit Card Payables: \$1,150
  - Short-Term Notes Payable: \$1,170

  Total Current Liabilities = $ 1,150 + 1,170 = 2,320 $

Now, calculate the liquidity ratio:

\[
\text{Liquidity Ratio} = \frac{5,100}{2,320} \approx 2.20
\]

So, **Josh's liquidity ratio is 2.20**, which matches the given value.

---

### Part 2: Analysis of Josh's Liquidity Relative to His Friends

Several of Josh's friends have liquidity ratios of about 1.6. Based on this, we can draw the following conclusions:

- **A.** Josh's ratio indicates that he is in a relatively better position to satisfy his future short-term debt obligations as they come due.  
  _True_: Since a higher liquidity ratio suggests that Josh has more liquid assets available to cover his short-term debts.

- **B.** Josh's ratio indicates that he is in a relatively inferior position to satisfy his existing short-term debt obligations as they come due.  
  _False_: Josh has a higher liquidity ratio than his friends, which means he's in a better position to cover short-term liabilities.

- **C.** Since Josh's liquidity ratio exceeds 1.6, Josh has less liquidity than his friends.  
  _False_: A higher liquidity ratio means more liquidity, not less.

- **D.** Since Josh's liquidity ratio exceeds 1.6, Josh has more liquidity than his friends.  
  _True_: His higher liquidity ratio means he has more liquid assets relative to his short-term liabilities.

---

### Correct Answers:
- **A.**  
- **D.**

---

Would you like further details or have any questions about the calculations?

### Related Questions:
1. How is a liquidity ratio of less than 1 interpreted?
2. What are some strategies to improve a person's liquidity ratio?
3. How do marketable securities affect liquidity compared to cash?
4. How does a liquidity ratio differ from a current ratio?
5. What is the ideal range for a personal liquidity ratio?

### Tip:
A liquidity ratio above 1.0 means you have more liquid assets than current liabilities, which is generally a good indicator of financial health.

Liquidity ratio Josh Smith has compiled some of his personal financial data in order to determine his liquidity position. The data are as follows: Account: Cash $3,240, Marketable securities $1,020, Checking account $840, Credit card payables $1,150, Short-term notes payable $1,170. a. Calculate Josh's liquidity ratio. b. Several of Josh's friends have told him that they have liquidity ratios of about 1.6. How would you analyze Josh's liquidity relative to his friends?

Learn how to calculate Josh Smith's liquidity ratio using his personal financial data. Explore how his liquidity ratio of 2.20 compares to his friends' liquidity ratios of 1.6. This financial ratio analysis is ideal for students in Grades 10-12 studying personal finance concepts.

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