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Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094

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BuyFindarrow_forward

Accounting

27th Edition
WARREN + 5 others
ISBN: 9781337272094
Textbook Problem

Quick ratio

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

Current Year Previous Year
Current assets:    
Cash $ 486,000 $ 500,000
Accounts receivable 210,000 200,000
Inventory 375,000 350.000
Total current assets $1,071,000 $1,050,000
Current liabilities:    
Current portion of long term debt $ 145,000 $ 110,000
Accounts payable 175,000 150,000
Accrued and other current liabilities 260,000 240,000
Total current liabilities $ 580.000 $ 500.000
  1. a. Determine the quick ratio for December 31 of both years.

  b.    Interpret the change in the quick ratio between the two balance sheet dates.

A.

To determine

Quick ratio: Quick ratio, also called as acid-test ratio, denotes that this ratio is a more rigorous test of solvency than the current ratio. It is determined by dividing quick assets and current liabilities. The acceptable quick ratio is 0.90 to 1.00. Use the following formula to determine the quick ratio:

Quick Ratio=Quick assetsCurrentliabilities

Quick Assets: Quick assetsare those assets that are most liquid. The examples of quick assets include cash and bank balances, temporary investments, and accounts receivable.

Current liabilities: Current liability is a kind of liability or the obligation of the business towards the creditors, in which the business is required to pay the creditors, within a period of one year or one operating cycle of the business, whichever is longer. The examples of current liabilitiesinclude Accounts payable, Salaries and Wages payable, Interest payable, Income Tax payable.

To compute: Quick ratio for December 31, current year and for December 31, previous year.

Explanation

Compute Quick ratio for December 31, current year, if Cash is given as $486,000, accounts receivable is given as $210,000, and current liabilities is given as $580,000.

Quick Ratio=Quick assetsCurrentliabilities=$486,000+$210,000$580,000=1.2

Compute Quick ratio for December 31, previous year, if Cash is given as $500,000, accounts receivable is given as $200,000, and current liabilities is given as $500,000

B.

To determine

To interpret: Company’s quick ratio.

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