   Chapter 17, Problem 4DQ

Chapter
Section
Textbook Problem

How would the current and quick ratios of a service business compare?

To determine

Current ratio and acid-test ratio

Current ratio: Current ratio is used to determine the relationship between current assets and current liabilities. The ideal current ratio is 2:1.

Formula:

Current Ratio=Current AssetsCurrent Liabilities

Acid-Test Ratio: This 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 acid-test ratio is 0.90 to 1.00. Use the following formula to determine the acid-

test ratio:

Acid Ratio=Quick AssetsCurrent Liabilities

Quick Assets are those assets that are most liquid. The examples of quick assets include cash and bank balances, marketable securities, and sundry debtors. Use the following formula to determine the Quick assets:

Quick Assets = Current assets-(Stock+prepaidexpense)

To compare: Current and quick ratios of the service revenue.

Explanation

These two ratios are very close as the most service businesses se...

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