Question: 1. Current liabilities affect a company's liquidity. What is liquidity, and how do we evaluate it?
2. Explain the differences among working capital, the current ratio, and the acid-test ratio.
3. How would the following transactions affect the current ratio and the acid-test ratio?
(a) Purchase of inventory with cash; and
(b) sale of inventory for more than its cost. Assume that prior to these transactions the current ratio and acid-test ratio are both less than one.