Question

In: Accounting

Nabros Company reported the following current assets and liabilities for December 31 for two recent years

Particulars	Dec 31,Current year	Dec 31,Previous year
Cash	650	680
Temporary Investments	1,500	1,550
Accounts Receivable	700	770
Inventory	1,250	1,400
Accounts payable	2,375	2,000

(a) Compute the quick ratio on December 31 of both year

(b) Interpret the company 's Quick ratio.Is the quick ratio improving or declining

Expert Solution

Quick ratio : The quick ratio, also known as the acid test ratio, signifies a more stringent test of solvency than the current ratio. It is calculated by dividing current assets by current liabilities. The allowable quick ratio ranges from 0.90 to 1.00.

Qucik assets : The most liquid assets are those that are quick assets. Cash and bank balances, short-term investments, and accounts receivable are all examples of fast assets.

Current liabilities : A type of liability known as a current liability is an obligation a business has to its creditors under which the business must pay the creditors within a year or one business cycle, whichever is longer. Current liabilities include obligations to pay accounts, salaries and wages, interest, and income taxes.

(a)Calculation of Quick ratio on December 31,Current Year

Quick ratio = Quick assets / Current liabilities

=$650 + $1,500 + $700 / $2.375

=1.2

Calculation of Quick rato on December 31, Previous year

Quick ratio = Quick assets / Current liabilities

=$680 + $1,550 + $770 / $2,000

=1.5

(b)The company's quick ratio has decreased from 1.5 in the prior year to 1.2 in the present year. Cash, short-term investments, and accounts receivable are three categories of fast assets that have had relatively moderate declines in comparison to current liabilities and accounts payable.

(a)Quick ratio on December 31,current year is 1.2

(b)Quick ratio on December 31,Previous year is 1.5

balaji rao answered 2 years ago

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