Calculate the quick ratio from the following information of a manufacturing firm. Cash in hand = $200,000
Cash at bank = $100,000
Inventories = $100,000.
Current Liabilities = $100,000
A) 2:1
B) 1:2
C) 3:1
D) 4:1
E) 2:2

Question

Quizplus · Accepted Answer

Quick ratio, also known as acid-test ratio, is calculated as (Cash in hand + Cash at bank + Accounts Receivable) / Current Liabilities. In this case, there is no information given regarding the accounts receivable, so we can only use the cash in hand and cash at bank, which add up to $300,000. Dividing this by the current liabilities of $100,000 gives us a quick ratio of 3:1. However, inventories are not considered as they may not be easily converted into cash. Therefore, the quick ratio would change to (Cash in hand + Cash at bank) / Current Liabilities or $300,000 / $100,000, which simplifies to 3:1. However, since inventory is not as liquid as cash, it is removed from the calculation to allow for a more accurate representation of the company's ability to pay off its current liabilities in the short run. Therefore, the correct quick ratio is 2:1, making option A the best choice.

Calculate the Quick Ratio from the Following Information of a Manufacturing