   Chapter 9, Problem 5CDQ

Chapter
Section
Textbook Problem

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

To determine

Concept Introduction:

Current Ratio:

Current Ratio is the measure of the company's ability to pay off its current liabilities using its current assets. It is calculated by dividing the total current assets by total current liabilities. The formula of the current ratio is as follows:

Current Ratio=Current assetsCurrent liabilities

Acid test ratio:

Acid test ratio is also called Quick ratio. This ratio is calculated by dividing the quick assets (Cash, Cash equivalents, Short term investments and current receivables) by total current liabilities for the year. The formula for Acid test ratio is as follows:

Acid test ratio = (Cash + Cash equivalents + Short term investments + Accounts receivables) Current Liabilities

To Indicate:

The Comparison of Current and quick ratios.

Explanation

Current Ratio is the measure of the company's ability to pay off its current liabilities using its current assets. It is calculated by dividing the total current assets by total current liabilities. The formula of the current ratio is as follows:

Current Ratio=Current assetsCurrent liabilities

Acid test ratio is also called Quick ratio. This ratio is calculated by dividing the quick assets (Cash, Cash equivalents, Short term investments and current receivables) by total current liabilities for the year. The formula for Acid test ratio is as follows:

Acid test ratio

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