Question

The following items are reported on a company's balance sheet: Cash $289,000 Marketable securities 97,600 Accounts receivable 251,200 Inventory 211,100 Accounts payable 324,700 Round your answers to two decimal places.

a. Determine the current ratio.
b. Determine the quick ratio.

Answer 1

The company's current ratio is approximately 2.61, indicating it has $2.61 in current assets for every dollar of current liabilities. The quick ratio is approximately 1.94, which represents more immediate liquidity by excluding inventory.

Step-by-step explanation:

To gauge a company's short-term financial health, financial analysts often calculate liquidity ratios such as the current ratio and the quick ratio. To calculate these ratios, we use the balance sheet figures provided.

Current Ratio

The current ratio is determined by dividing current assets by current liabilities. Current assets include cash, marketable securities, accounts receivable, and inventory. Current liabilities, in this case, are accounts payable.

Current Ratio = (Cash + Marketable Securities + Accounts Receivable + Inventory) / Accounts Payable

Current Ratio = ($289,000 + $97,600 + $251,200 + $211,100) / $324,700

Current Ratio = $849,000 / $324,700

Current Ratio ≈ 2.61

Quick Ratio

The quick ratio is similar to the current ratio but excludes inventory from the current assets, as inventory is not as quickly convertible into cash.

Quick Ratio = (Cash + Marketable Securities + Accounts Receivable) / Accounts Payable

Quick Ratio = ($289,000 + $97,600 + $251,200) / $324,700

Quick Ratio ≈ 1.94