Cartman’s Cats shows the following balances:
Cash: $20,000
Accounts Receivable: $60,000
Inventory: $80,000
Accounts Payable: $60,000
Wages Payable : $60,000
What is the quick ratio for the business?
Explanation
Answer - C - The quick ratio is .7: 1 and is calculated by:
Cash $20,000 +
Temporary Investments $0 +
Accounts Receivable $60,000
Total $80,000
Divided by:
Accounts Payable $60,000 +
Wages Payable $60,000
Total $120,000
80,000/120,000 = .667 rounded to .7 It is expressed .7 : 1
Key Takeaway: The quick ratio, also called the acid test ratio, is a financial ratio used to gauge a company’s liquidity. The quick ratio compares the total amount of cash + marketable securities + accounts receivable to the amount of current liabilities.
