Question

An extract of a balance sheet is given. What are current ratio and the quick ratio

Answer 1

Answer:

current ratio:

C.2.6:1

Quick ratio:

1.9:1

Explanation:

Current Ratio measures the ability of a business to pay its short term debts.

Quick Ratio measures the ability of the business to measure the available of liquid assets to pay the immediate debts.

Current Assets =  Cash + Cash at bank + Account Receivable + Prepayments + Inventory = $2,000 + $20,000 + $5,500 + $1,500 + $10,000 = $39,000

Current Liabilities = Account Payable + Wages Payable + Tax Payable = $12,000 + $1,500 + $1,500 = $15,000

Current ratio = Current assets / Current Liability = $39,000 / $15,000 = 2.6

Quick ratio = ( Current assets - Inventory )/ Current Liability = ( $39,000 - $10,000 ) / $15,000 = $29,000 / $15,000 = 1.9