   Chapter 11, Problem 11.24EX

Chapter
Section
Textbook Problem

Quick ratioThe current assets and current liabilities for Apple Inc. and HP, Inc., are as follows at the end of a recent fiscal period:   Apple Inc. (in millions) HP, Inc. (in millions) Current assets:     Cash and cash equivalents $21,120$17,433 Short-term investments 20,481 0 Accounts receivable 35,889 16,281 Inventories 2,349 6,485 Other current assets* 9.539 11,588 Total current assets $89,378$51,787 Current liabilities:     Accounts payable $60,671$32,418 Accrued and other current liabilities 19,939 9,773 Total current liabilities $80,610$42,191 * These represent prepaid expense and other non quick current assets.a. Determine the quick ratio for both companies. Round to one decimal place.b. Interpret the quick ratio difference between the two companies.

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 Determine: Quick ratio for Incorporation A and Incorporation H.

Explanation

Determine Quick ratio for Incorporation A, if Cash is given as $21,120 million, short-term investment is given as$20,481million, accounts receivable is given as $35,889 million, and current liabilities is given as$80,610 million.

Quick Ratio=Quick assetsCurrentliabilities=($21,120+$20,481+$35,889)million$80,610million=1

B.

To determine

To interpret: Quick ratio between Incorporation A and Incorporation H.

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