And extract of a balance sheet is given. What are the current ratio and the quick ratio?
Balance Sheet:
Cash-$2,000
Cash at bank - $20,000
Accounts receivable-$5,500
Prepayments-$1,500
Inventory-$10,000
Accounts Payable-$12,000
Wages Payable-$1,500
Taxes Payable-$1,500
The current ratio is A. 1.5:1
B. 2.0:1
C.2.6:1
The quick ratio is
A.1.9:1
B.2.6:1
C.2.5:1
Answers
Current ratio is 2.6. So, correct option is C
Quick ratio is 1.9. So, correct option is A
Explanation:
The formula for computing the current ratio (CR) is as:
Current ratio = Current assets / Current liabilities
where
Current assets (CA) involve :
CA = Cash + Cash at bank + Accounts receivable + Inventory + Pre- payments (prepaid expense)
CA = $2,000 + $20,000 + $5,500 + $1,500 + $10,000
CA = $39,000
Current Liabilities (CL) involve:
CL = Accounts Payable + Wages Payable + Taxes Payable
CL = $12,000 + $1,500 + $1,500
CL = $15,000
Putting the values above:
Current Ratio = $39,000 / $15,000
Current ratio = 2.6
The formula for computing the quick ratio as:
Quick ratio = Liquid Current assets / Current assets
where
The Liquid current assets involve:
Liquid current assets = Cash + Cash at bank + Accounts receivable
Liquid current assets = $2,000 + $20,000 + $5,500
= $27,500
Current Liabilities (CL) involve:
CL = Accounts Payable + Wages Payable + Taxes Payable
CL = $12,000 + $1,500 + $1,500
CL = $15,000
Putting the values above:
Quick ratio = $27,500 / $15,000
Quick ratio = 1.9