Question

Parker Lane Cafe currently has $160,000 in cash, $380,000 in inventory, and $40,000 in accounts receivable. The company also has $40,000 in accounts payable, and $10,000 in other current liabilities. What is its quick ratio?
a. 11.6: 1
b. 4: 1
c. 3.2: 1

Answer 1

Answer:

Parker Lane Cafe's quick ratio is b. 4: 1

Explanation:

The quick ratio is a liquidity ratio that indicates a company's ability to pay its current liabilities when they come due without needing to sell its inventory or get additional financing. The quick ratio is calculated by the following formula:

Quick ratio = (Cash & equivalents + Short Term investments + Accounts receivable)/Current Liabilities

Parker Lane Cafe has $160,000 in cash and $40,000 in accounts receivable. The company also has $40,000 in accounts payable, and $10,000 in other current liabilities

Total Current Liabilities of the company = $40,000 + $10,000 = $50,000

Quick ratio = ($160,000 + $40,000)/$50,000 = $200,000/$50,000 = 4:1