BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094
BuyFind

Accounting

27th Edition
WARREN + 5 others
Publisher: Cengage Learning,
ISBN: 9781337272094

Solutions

Chapter
Section
Chapter 11, Problem 11.8APE
Textbook Problem

Quick ratio

Nabors Company reported the following current -assets and liabilities for December 31 for two recent years:

  Dec 31, Current Year Dec. 31, Previous Year
Cash $ 6S0 $680
Temporary investments 1,500 1.550
Accounts receivable 700 770
Inventory 1,250 1.400
Accounts payable 2,37S 2.000
  1. a. Compute the quick ratio on December 31 of both years.
  2. b. Interpret the company's quick ratio. Is the quick ratio improving or declining?

Expert Solution

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 on December 31, current year and December 31, previous year.

Explanation of Solution

Compute Quick ratio on December 31, current year, if Cash is given as $650, Temporary investments is $1,500, accounts receivable is $700, and accounts payable (current liabilities) is given as $2,375.

Quick Ratio=Quick assetsCurrentliabilities=$650+$1,500+$700$2,375=1

Expert Solution

B.

To determine

To interpret: Company’s quick ratio.

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Chapter 11 Solutions

Accounting
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