Question

Exhibit 4.1 The balance sheet and income statement shown below are for Koski Inc. Note that the firm has no amortization charges, it does not lease any assets, none of its debt must be retired during the next 5 years, and the notes payable will be rolled over. Balance Sheet (Millions of $) Assets 2016 Cash and securities $2,145 Accounts receivable 8,970 Inventories 12,480 Total current assets $23,595 Net plant and equipment $15,405 Total assets $39,000 Liabilities and Equity Accounts payable $7,410 Accruals 4,290 Notes payable 5,460 Total current liabilities $17,160 Long-term bonds $7,800 Total liabilities $24,960 Common stock $5,460 Retained earnings 8,580 Total common equity $14,040 Total liabilities and equity $39,000 Income Statement (Millions of $) 2016 Net sales $58,500 Operating costs except depreciation 54,698 Depreciation 1,024 Earnings before interest and taxes (EBIT) $2,779 Less interest 829 Earnings before taxes (EBT) $1,950 Taxes 683 Net income $1,268 Other data: Shares outstanding (millions) 500.00 Common dividends (millions of $) $443.63 Int rate on notes payable & L-T bonds 6.25% Federal plus state income tax rate 35% Year-end stock price $30.42 what is the company quick ratio

Answer 1

Answer:

Koski Inc.

Quick Ratio:

Quick Ratio = (Current Assets - Inventory) divided by Current Liabilities

Quick Ratio = $(23,595 - 12,480) / $(17,160 -5,460)

Quick Ratio = 11,115 / 11,700 = 0.95

Explanation:

The quick ratio is a financial metric that shows the short-term liquidity position of a company.  It measures the company's ability to settle its short-term obligations using its most liquid current assets.  The most liquid assets are cash and near cash current assets.

Inventory is always removed in calculating the most liquid current assets.  Inventory will take some time before it can be converted to cash or near cash, given the cash conversion cycle.

The quick ratio is also called the acid-test ratio.  It is also considered as more conservative than the current ratio which measures the coverage of current liabilities by all current assets, including inventory.

In our workings, we eliminated inventory from current assets.  We also eliminated notes payable which would be rolled over the next year.