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 0.7 : 1 and is calculated by:
(Cash + Temporary Investments + Accounts Receivable) / (Accounts Payable + Wages Payable)
(20,000 + 0 + 60,000) / (60,000 = 60,000)
80,000 / 120,000
0.667
Rounded to 0.7, it is expressed as 0.7 : 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, and accounts receivable to the amount of current liabilities.
