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    Current Quick Ratio Problem

    Uploaded by

    Kae Min Hyo
    The document provides information to calculate a company's current assets based on its current ratio, quick ratio, cost of sales, and inventory turnover. It states that Beatnik Company has a current ratio of 2.5 and quick ratio of 2.0. With cost of sales of $2 million and inventory turnover of 8 times per year, the average inventory is calculated to be $250,000. Using the ratios and subtracting inventory from current assets gives current liabilities of $500,000. Plugging this into the current ratio formula gives total current assets of $1,250,000.

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    Current Quick Ratio Problem

    Uploaded by

    Kae Min Hyo
    2K views5 pages
    The document provides information to calculate a company's current assets based on its current ratio, quick ratio, cost of sales, and inventory turnover. It states that Beatnik Company has a current ratio of 2.5 and quick ratio of 2.0. With cost of sales of $2 million and inventory turnover of 8 times per year, the average inventory is calculated to be $250,000. Using the ratios and subtracting inventory from current assets gives current liabilities of $500,000. Plugging this into the current ratio formula gives total current assets of $1,250,000.

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    The document provides information to calculate a company's current assets based on its current ratio, quick ratio, cost of sales, and inventory turnover. It states that Beatnik Company has a current ratio of 2.5 and quick ratio of 2.0. With cost of sales of $2 million and inventory turnover of 8 times per year, the average inventory is calculated to be $250,000. Using the ratios and subtracting inventory from current assets gives current liabilities of $500,000. Plugging this into the current ratio formula gives total current assets of $1,250,000.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    2K views5 pages

    Current Quick Ratio Problem

    Uploaded by

    Kae Min Hyo
    The document provides information to calculate a company's current assets based on its current ratio, quick ratio, cost of sales, and inventory turnover. It states that Beatnik Company has a current ratio of 2.5 and quick ratio of 2.0. With cost of sales of $2 million and inventory turnover of 8 times per year, the average inventory is calculated to be $250,000. Using the ratios and subtracting inventory from current assets gives current liabilities of $500,000. Plugging this into the current ratio formula gives total current assets of $1,250,000.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    of 5

    Current Ratio/Quick Ratio Problem

    Beatnik Company has a current ratio of 2.5 and a quick


    ratio of 2.0. If the firm experienced $2 million in cost of
    sales and sustains an inventory turnover of 8.0, what
    are the firm’s current assets?

    A. $1,250,000
    Current Ratio Def.
    Current Ratio = Current Assets / Current Liabilites

    Also known as "liquidity ratio", "cash asset ratio" and "cash ratio".

    The ratio is mainly used to give an idea of the company's ability to pay back its short-term
    liabilities (debt and payables) with its short-term assets (cash, inventory, receivables). The higher
    the current ratio, the more capable the company is of paying its obligations. A ratio under 1
    suggests that the company would be unable to pay off its obligations if they came due at that
    point. While this shows the company is not in good financial health, it does not necessarily mean
    that it will go bankrupt - as there are many ways to access financing - but it is definitely not a
    good sign.

    The current ratio can give a sense of the efficiency of a company's operating cycle or its ability to
    turn its product into cash. Companies that have trouble getting paid on their receivables or have
    long inventory turnover can run into liquidity problems because they are unable to alleviate their
    obligations. Because business operations differ in each industry, it is always more useful to
    compare companies within the same industry.

    This ratio is similar to the acid-test ratio except that the acid-test ratio does not include inventory
    and prepaids as assets that can be liquidated. The components of current ratio (current assets
    and current liabilities) can be used to derive working capital (difference between current assets
    and current liabilities). Working capital is frequently used to derive the working capital ratio,
    which is working capital as a ratio of sales.
    Quick Ratio Def.
    An indicator of a company's short-term liquidity. The quick ratio measures a company's
    ability to meet its short-term obligations with its most liquid assets. The higher the quick
    ratio, the better the position of the company.

    The quick ratio is calculated as:

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

    Also known as the "acid-test ratio" or the "quick assets ratio".

    The quick ratio is more conservative than the current ratio, a more well-known liquidity
    measure, because it excludes inventory from current assets. Inventory is excluded
    because some companies have difficulty turning their inventory into cash. In the event
    that short-term obligations need to be paid off immediately, there are situations in which
    the current ratio would overestimate a company's short-term financial strength.
    Calculation
    Current Ratio Current Assets 2.5
    Current Liabilities

    Quick Ratio Current Assets -Inventories 2


    Current Liabilities

    Cost of Sales $ 2,000,000.00

    Inventory Turnover Cost of Goods Sold 8


    Average inventory
    Explanation
    Answer (A) is correct.

    only major difference between the current ratio and the quick
    ratio is the inclusion of inventory in the numerator. If cost of sales
    is $2 million and inventory turns over 8 times per year, then
    average inventory is $250,000 ($2,000,000 ÷ 8). Since the only
    difference between the two ratios is inventory, then inventory
    must equal .5 (2.5 – 2.0) times current liabilities; therefore, current
    liabilities are $500,000. Thus, current assets divided by $500,000
    equals 2.5. Therefore, current assets must equal $1,250,000 (2.5 ×
    $500,000).

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