spending and payment patterns to produce a current ratio that is desired.

Paying off accounts

payable with cash at year-end will improve the current ratio, for instance, but may not be a sign
of improved liquidity.

Quick Ratio
The quick ratio is also called the “acid test” ratio. That’s because the quick ratio looks only at a
company’s most liquid assets and compares them to current liabilities. The quick ratio tests
whether a business can meet its obligations even if adverse conditions occur. In general, quick
ratios between 0.5 and 1 are considered satisfactory, as long as the collection of receivables is
not expected to slow.
a) Current Ratio
Current Ratio = Current Assets

Current Liabilities

b) Quick Ratio
Quick Ratio =Current Assets – Inventories +Prepaid
Expenses

Current Liabilities
 Cash Ratio = Cash + Marketable securities

Current Liabilities

Cash Ratio = Cash + Marketable securities

Sales

Cash Ratio = Cash + Marketable securities

Total Assets

Question: 1 Review the results of the following current ratio and quick ration.
Current Ratio Quick Ratio
Year 1: $1,500 / $1,000 = 1.5 ($1,500 - $600) / $1,000 = 0.9
Year 2: $2,000 / $1,250 = 1.6 ($2,000 - $1,100) / $1,250 = 0.7
Year 3 $2,500 - $1,485 = 1.7 ($2,500 - $1,700) / $1,485 = 0.5
Year 4 $3,000 / $1,500 = 2.0 ($3,000 - $2,200) / $1,500 = 0.5

Required: Review the results of the following current ratio and quick ratio and explain the
possible reasons of the above trends in the results from year 1 to 4.

Answer: The current ratio has shown an increasing trend over the four years and can be
considered respectable as seen in year 4. However, this 4 year upward trend has been at the cost
of stocking more inventory and this has resulted in a downward trend in the quick ratio, which
has become 0.5 in Year 4.

Question: 2 Review the results of the following current ratio and quick ration.
Current ratio = $570,000 / $165,000 = 3.5
Quick ratio = ($218,000) / $165,000 = 1.3

Required: Review the results of the following current ratio and quick ratio and explain the
possible reasons of the above trends in the results of two ratios.

Answer: Both the current ratio and the quick ratio exceed the standard criteria. Based on
these ratios, the company’s current asset position is strong, and short-term liquidity is not a
concern. In fact, these ratios suggest that perhaps the company’s investment in current assets is
more than what is required in order to support the sales function and finance operations.

.
Question: 3 Review the results of the following current ratio and quick ratio of A-Tech and
Bi-Sci.
Ratios for A-Tec and B-Sci:
A-Tech Bi-Sci

2001 2000 2001 2000

(1) Current ratios 1.16 .95 2.25 2.17

(2) Working capital $11 ($2) $30 $28

Required: Review the results of the above current ratio and working capital ratio and explain
the possible reasons of the above trends in the results of two ratios.

Answer: Bi-Sci appears to be in a better liquidity position. Its current ratio is much higher
than A-Tech’s and its working capital is also higher. A-Tec’s current ratio and working capital
have improved but they are still lower.

Question: 4 Review the results of the following current ratio and quick ratio for two years.

1998 1997
1. Current ratio $116,838 / $306,143 $62,582 / $261,123

= 0.38 = 0.24
2. Quick ratio $85,686 / $306,143 $45,550 / $261,123

= 0.28 = 0.17
Required: Review the results of the above current ratio and quick ratio and explain the
possible reasons of the above trends in the results of two ratios.

Answer: This company appears to be a risky investment from a short-term perspective because its
current and quick ratios are very poor, and indicate that the company might experience cash flow
problems when its current liabilities become due. In particular, the total of its current assets are
insufficient to cover either accounts payable and accrued liabilities or the current portion of long-term
debt. This means that additional short-term financing must be obtained for the company to remain
solvent.
Question # 5: The following data are adapted from a recent annual report of G.F.C.
Limited a leading fans manufacturer. The current ratio of G.F.C. Limited a leading fans
manufacturer is 5.5 to1 and quick ratio is 4 to 1. Inventory is Rs. 30,000.

Required: Compute the value of current liabilities.

Question # 6: The following data are adapted from a recent annual report of G.F.C.
Limited a leading fans manufacturer. The current liabilities of G.F.C. Limited a leading fans
manufacturer are 120,000 and quick ratio is 2 to 1. Inventory is of Rs. 60,000.

Required: Compute the value of current ratio.

Question # 7: The following data are adapted from a recent annual report of G.F.C.
Limited a leading fans manufacturer. The current liabilities of G.F.C. Limited a leading fans
manufacturer are 25,000 and quick ratio is 1.5 to 1. Inventory is of Rs. 12,500.

Required: Compute the value of current assets.

Question # 8: The following data are adapted from a recent annual report of G.F.C.
Limited a leading fans manufacturer. The current liabilities of G.F.C. Limited a leading fans
manufacturer are 300,000. If current ratio is 3 to 1 and quick ratio is 1 to 1.

Required: Compute the value of inventory.

Question # 9: The following financial data was taken from the financial annual statements of the
smith corporation:
2009 2010 2011
Current Assets $450,000 $400,000 $500,000
Current liabilities 390,000 300,000 340,000
Inventory 80,000 20,000 25,000

Required: Based on the data given above calculate the following for the year 2010 and 2011.
1. Working capital.
2. Net Working Capital
3. Current ratio.
4. Quick ratio.

Question # 10: FOXX COMPANY

Balance Sheet
December 31, Year 2
Assets Liabilities and equity
Current assets: Current liabilities:
Cash $75,000 Noncurrent liabilities $100,000
Accounts receivable $75,000 Current liabilities $250,000
Inventory $50,000 Total equity $250,000
Noncurrent assets $300,000 preliminary expenses 50,000
Total assets $500,000 Total Liabilities and equity $500,000
Required:
a. Working capital.
b. Net working
a. Current Ratio.
b. Quick Ratio.
c. deferred cost

Question # 11: A partial balance sheet and income statement for King Corporation follow:
Current assets:
Opening stock $ 47,000
Closing stock 215,147
Cash 10,000
Cash at Bank 15,000
Marketable Securities 50,000
Bill Receivable 15,000
Trade receivables 255,000
Provision for bad debts 2,000
Loose tools 4,000
Inventories 23,000
Prepaid expenses 26,180
Total current assets $ 662,327
Current liabilities:
Provision for taxation $ 103,689
Notes payable 210,381
Accrued expenses and other liabilities 120,602
Income taxes payable 3,120
Current maturities of long-term debt 22,050
Total current liabilities $ 459,842
Required Compute the following:
a. Working capital.
b. Net Working Capital.
c. Current ratio.
d. Acid-test ratio/Quick ratio.
e. Cash ratio.
Question # 12:
Suppose you calculate the following ratios for two firms, A and B.
Firm A Firm B
Current ratio 2.0 2.0
Quick ratio 1.0 1.5
Required: What can you say about the relative investment in inventory?

Question # 13:
A company has current liabilities of $500 million, and its current ratio is 2.0.
Required:
1. What is the total of its current assets?
2. If this firm’s quick ratio is 1.6, how much inventory does it have?