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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

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

  Dec 31, Current Year Dec. 31, Previous Year
Cash $1,000 $1,140
Temporary investments 1.200 1,400
Accounts receivable 800 910
Inventory 2.200 2,300
Accounts payable 1,875 2,300
  1. a. Compute the quick ration on December 31 of both years.
  2. b. Interpret the company’s quick ratio. Is the quick ratio improving or declining

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

Compute Quick ratio on December 31, current year, if Cash is given as $1,000, Temporary investments is $1,200, accounts receivable is $800, and accounts payable (current liabilities) is given as $1,875.

Quick Ratio=Quick assetsCurrentliabilities=$1,000+$1,200+$800$1,875=1

B.

To determine

To interpret: Company’s quick ratio.

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