Question

Gmeiner Co. had the following current assets and liabilities on December 31 of two recent years: Current Year Previous Year Current assets: Cash $683,000 $649,000 Accounts receivable 605,000 305,000 Inventory 374,000 258,000 Total current assets $1,662,000 $1,212,000 Current liabilities: Current portion of long-term debt $90,000 $80,000 Accounts payable 179,000 159,000 Accrued and other current liabilities 291,000 291,000 Total current liabilities $560,000 $530,000 a. Determine the quick ratio for December 31 of both years. If required, round your answers to one decimal place. Quick Ratio Previous year: Current year: b. How did the quick ratio change between the two balance sheet dates?

Answer 1

a. Previous year Quick Ratio is 1.8, while Current year Quick Ratio is 2.3.

b. The quick ratio has increased by 0.5 in abos0lute term which indicates an increase of 27.8% in percentage term between the two balance sheet dates.

Step-by-step explanation:

a. Determine the quick ratio for December 31 of both years. If required, round your answers to one decimal place.

The quick ratio is a ratio that indicates the ability of company to employ its quick, most liquid or near cash assets to meets its short-term or current liabilities. The ratio is also known as the acid-test test ratio and can be estimated using the following formula:

Quick ratio = (Total Current assets - Inventory) / Total current liabilities

Using the formula above, we have:

Previous year Quick Ratio = ($1,212,000 - $258,000) / $530,000 = 1.8

Current year Quick Ratio = ($1,662,000 - $374,000) / $560,000 = 2.3

b. How did the quick ratio change between the two balance sheet dates?

This can be determined both in absolute term and in percentage term as follows:

Absolute change = Current year Quick Ratio - Previous year Quick Ratio = 2.3 - 1.8 = 0.5 increase

Percentage change = (Current year Quick Ratio - Previous year Quick Ratio) / Previous year Quick Ratio = [(2.3 - 1.8) / 1.8] * 100 = 27.8%

From the above, the quick ratio has increased by 0.5 in abos0lute term which indicates an increase of 27.8% in percentage term between the two balance sheet dates.