Question

Water Works, Inc. has a current ratio of 1.33, current liabilities of $540,000, and inventory of $400,000. What is Water Works, Inc.'s quick ratio?

a	1.11
b	0.86
c	1.90
d	0.59

Answer 1

Solution :

We know that the formula for calculating the Current ratio is

Current Ratio = Current Assets / Current Liabilities

As per the information given in the question we have

Current ratio = 1.33

Current Liabilities = $ 540,000

Applying the above values in the current ratio formula we have

Current Assets / $ 540,000 = 1.33

Current Assets = 1.33 * $ 540,000

Thus Current Assets = $ 718,200

To find Quick Ratio :

The formula for calculating the quick ratio is

Quick Ratio = ( Current Assets – Inventory ) / Current Liabilities

As per the information given in the question we have

Current Assets = $ 718,200        ; Inventory = $ 400,000         Current Liabilities = $ 540,000

Applying the above values in the formula we have

Quick Ratio = $ 718,200 - $ 400,000 / $ 540,000

= $ 318,200 / $ 540,000

= 0.5893

= 0.59 ( when rounded off to two decimal places )

Thus the Quick Ratio of Water Work’s Inc. is = 0.59

Thus the solution is Option d. 0.59