Souvenirs Pty Ltd has a current ratio of 3:1 and current liabilities of $15 000. If Souvenirs Ltd has $10 000 of inventory, what is the quick ratio?

Question

Quizplus · Accepted Answer

The quick ratio, also known as the acid test ratio, excludes inventory from current assets as it is not always easy to convert into cash quickly. Therefore, we need to calculate Souvenirs Pty Ltd's quick assets, which are the assets that can be quickly converted into cash. We can calculate quick assets using the following formula:

Quick assets = current assets - inventory

Given that the current ratio of Souvenirs Pty Ltd is 3:1, we can determine their current assets:

3:1 = current assets / current liabilities
current assets = 3 x current liabilities
current assets = 3 x $15,000
current assets = $45,000

Now that we have calculated the current assets, we can determine the quick assets:

Quick assets = current assets - inventory
Quick assets = $45,000 - $10,000
Quick assets = $35,000

Finally, we can calculate the quick ratio:

Quick ratio = quick assets / current liabilities
Quick ratio = $35,000 / $15,000
Quick ratio = 2.33 to 1

Therefore, the best choice is C, with a quick ratio of 2.33 to 1.

Souvenirs Pty Ltd Has a Current Ratio of 3:1 and Current