Question

The december 31 balance sheet of iyer company includes the following information:

inventory $750,000
prepaid expenses 60,000
total current assets 1,800,000
total current liabilities 875,000
accounts payable 540,000

what is iyer's quick ratio at december 31?
a. 1.85
b. 0.80
c. 2.57
d. 1.13

Answer 1

The correct answer is D. The quick ratio for Iyer Company is calculated by deducting inventory and prepaid expenses from total current assets, then dividing by total current liabilities, which equals a ratio of 1.13. This means Iyer Company has $1.13 in liquid assets for every dollar of current liabilities.

Step-by-step explanation:

The quick ratio, also known as the acid-test ratio, is a measure of a company's ability to meet its short-term obligations with its most liquid assets. It is calculated by subtracting inventory and any current prepayments from current assets, and then dividing the remainder by current liabilities. To calculate the quick ratio for Iyer Company:

Quick Ratio = (Total Current Assets - Inventory - Prepaid Expenses) / Total Current Liabilities

Quick Ratio = ($1,800,000 - $750,000 - $60,000) / $875,000

Quick Ratio = $990,000 / $875,000

Quick Ratio = 1.13

Thus, the correct answer is (d) 1.13, indicating that Iyer Company has $1.13 in quick assets for every dollar of current liabilities.