Question

Gmeiner Co. had the following current assets and liabilities on December 31 of two recent years:

				Current Year		Previous Year
Current assets:
	Cash			$746,000		$985,000
	Accounts receivable			661,000		464,000
	Inventory			408,000		391,000
		Total current assets		$1,815,000		$1,840,000
Current liabilities:
	Current portion of long-term debt			$107,000		$95,000
	Accounts payable			214,000		189,000
	Accrued and other current liabilities			349,000		346,000
		Total current liabilities		$670,000		$630,000

a. Determine the quick ratio for December 31 of both years. If required, round your answers to one decimal place.

	Quick Ratio
Previous year:
Current year:

b. How did the quick ratio change between the two balance sheet dates?

Answer 1

			Dec. 31, Current Year	Dec. 31, Previous Year
Quick Assets	=	[Current Assets – Inventory – Prepaid expenses]	($1,815,000 - $408,000 - 0)	($1,840,000 - $391,000 - 0)
			$14,07,000	$14,49,000
Quick Ratio	=	Quick Assets / Current Liabilities	Dec. 31, Current Year	Dec. 31, Previous Year
			$1,407,000 / $670,000	$1,449,000 / $630,000
			2.1	2.3
Reasons for change in Quick Ratio:
	i)	The Quick Ratio decreased between the two Balance Sheet Dates. & it decreases when there is a decline in Quick Assets(Numeratior) or rise In Current Liabilities(Denominotor) or both.
	ii)	Clearly there is decline in our quick assets since last year by $42,000 ($1,449,000 - $1,407,000) & corresponding rise in Current Liabilites $40,000 ($670,000 - $630,000)
	iii)	Possibly the rise in inventory has lead to reduction in cash & increase in accounts payable for its purchase.
	iv)	Also accounts receivables increased but there is a huge reduction in cash this can be due to increased non-cash sales or delayed cash collections & causing more of baddebts.
	v)	And that probably caused fall in quck assets and rise in current liabilities.
	vi)	The Current Year ratio being 2.1 is still a good hold. However if compared to past year's Quick Ratio & above mentioned observations, it indicates weaker management of working capital and calls for a check on Working Capital Management.