What is the quick ratio if current assets are 80,000, current liabilities are 30,000, and inventory is 12,000?

What is the quick ratio if current assets are 80,000, current liabilities are 30,000, and inventory is 12,000?

• A. 1.5
• B. 2.27
• C. 3.1
• D. 2.0

Answer: (B)

To determine the quick ratio, also known as the acid-test ratio, the formula used is: Quick Ratio = (Current Assets - Inventory) / Current Liabilities In this scenario, current assets are given as 80,000, current liabilities are 30,000, and inventory is 12,000. First, we need to subtract inventory from current assets: Quick Assets = Current Assets - Inventory Quick Assets = 80,000 - 12,000 Quick Assets = 68,000 Next, we can apply the quick ratio formula: Quick Ratio = Quick Assets / Current Liabilities Quick Ratio = 68,000 / 30,000 Quick Ratio = 2.27 The result of 2.27 indicates a strong liquidity position, as the company has more than double its current liabilities covered by its more liquid assets. This reflects a good ability to meet short-term obligations without relying on inventory, which may not be as readily convertible to cash compared to other assets. This understanding underscores the importance of the quick ratio as a measure of financial health, particularly in assessing a company's ability to cover its liabilities with its liquid assets.

To determine the quick ratio, also known as the acid-test ratio, the formula used is:

Quick Ratio = (Current Assets - Inventory) / Current Liabilities

In this scenario, current assets are given as 80,000, current liabilities are 30,000, and inventory is 12,000.

First, we need to subtract inventory from current assets:

Quick Assets = Current Assets - Inventory

Quick Assets = 80,000 - 12,000

Quick Assets = 68,000

Next, we can apply the quick ratio formula:

Quick Ratio = Quick Assets / Current Liabilities

Quick Ratio = 68,000 / 30,000

Quick Ratio = 2.27

The result of 2.27 indicates a strong liquidity position, as the company has more than double its current liabilities covered by its more liquid assets. This reflects a good ability to meet short-term obligations without relying on inventory, which may not be as readily convertible to cash compared to other assets.

This understanding underscores the importance of the quick ratio as a measure of financial health, particularly in assessing a company's ability to cover its liabilities with its liquid assets.