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:

Cash $300,000

Temporary investments 100,000

Accounts receivable (net) 200,000

Inventory 200,000

Accounts payable 400,000

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

Solutions

Expert Solution

The following formulae must be used to calculate the current ratio and quick ratio.

(a) Current Ratio = Current Assets / Current Liabilities

(b) Quick Ratio = (Current Assets - Inventory) / Current Liabilities

Given: Cash: $300,000 Temporary investments: $100,000 Accounts receivable (net): $200,000 Inventory: $200,000 Accounts payable: $400,000

(a) Current Ratio: Current Assets = Cash + Temporary investments + Accounts receivable (net) + Inventory = $300,000 + $100,000 + $200,000 + $200,000 = $800,000

Current Liabilities = Accounts payable = $400,000

Current Ratio = Current Assets / Current Liabilities = $800,000 / $400,000 = 2

Therefore, the current ratio is 2.

(b) Quick Ratio: Quick Assets = Current Assets - Inventory = $800,000 - $200,000 = $600,000

Quick Ratio = Quick Assets / Current Liabilities = $600,000 / $400,000 = 1.5

Therefore, the quick ratio is 1.5 (rounded to one decimal place).

Therefore, the current ratio is 2.

Therefore, the quick ratio is 1.5 (rounded to one decimal place).

balaji rao answered 10 months ago

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