Final answer:
Nowaczyk Company's current ratio is 1.25, which is calculated by dividing their total current assets of $25,000 by their current liabilities of $20,000. The quick ratio is 0.65, calculated without including the inventory in the quick assets. Therefore, the current ratio is indeed higher than the quick ratio for Nowaczyk Company.
Step-by-step explanation:
The question pertains to calculating the current ratio and the quick ratio for the Nowaczyk Company using the given account balances. To determine the current ratio, we need to divide total current assets by total current liabilities. Here, the total current assets include Cash, Accounts Receivable, Inventory, and Prepaid Items, which amount to a total of $25,000 ($2,000 + $8,000 + $12,000 + $3,000). The current liabilities are given as $20,000.
Therefore, the current ratio is calculated as follows:
Current Ratio = Total Current Assets / Total Current Liabilities
Current Ratio = $25,000 / $20,000
Current Ratio = 1.25 or 125 to 100 (not 125 to 1).
The quick ratio, also known as the acid-test ratio, excludes inventory from current assets. As such, the quick assets would be Cash + Accounts Receivable + Prepaid Items = $2,000 + $8,000 + $3,000 = $13,000.
Quick Ratio = Quick Assets / Current Liabilities
Quick Ratio = $13,000 / $20,000
Quick Ratio = 0.65 or 65 to 100.
From these calculations, it is apparent that Nowaczyk's current ratio is higher than its quick ratio, as inventory is a less liquid form of asset and is excluded from the quick assets.