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Question

In: Accounting

Determine (a) the current ratio and (b) the quick ratio. Round to one decimal place.

The following items are reported on a company's balance sheet

Particulars	Amount$
Cash	100,000
Marketable securities	50,000
Accounts receivable (net)	60,000
Inventory	70,000
Accounts payable	140,000

Determine (a) the current ratio and (b) Quick ratio.Round to one decimal place

Solutions

Expert Solution

Financial ratios : Financial ratios are indicators used to assess a company's liquidity, capabilities, profitability, and overall performance.

Current ratio : To ascertain how current assets and liabilities are related, current ratio is utilised. Divide current assets by current liabilities to get the current ratio.

Formula to determine current ratio

Current ratio = Current assets / Current liabilities

=$280,000 / $140,000

=2.0

Calculation of current assets

Current assets = Cash + Marketable Securities + Accounts Receivable (net) + Inventory

=$100,000 + $50,000 +$60,000+$70,000

=$280,000

Acid test ratio : This ratio indicates that it is a more stringent measure of solvency than the current ratio. It is calculated by dividing current assets by current liabilities. 0.90 to 1.00 is the allowable acid test ratio

Quick asets : Quick assets are the most liquid assets. Cash and bank accounts, marketable securities, and Sundry debtors are examples of Quick assets.

Following formula is used to determine acid test ratio

Acid test ratio = Quick assets / Current liabilities

Calculation of Quick ratio

Quick ratio = Quick assets / Current liabilities

=$210,000 / $140,000

=1.5

Calculation of Quick assets

Current assets = Cash + Marketable securities + Accounts receivables

=$100,000 + $50,000 +$60,000

=$210,000

(a)Therefore , the current ratio is 2.0

(b)Therefore, the quick ratio is 1.5

balaji rao answered 1 year ago

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