Q25. Quick ratio
How is the quick ratio calculated?
A25.
Quick ratio
= Quick assets / Current liabilities
Quick assets
= Cash + Marketable securities + Accounts receivable
Inventory is not included in quick assets.
[Entity 25-a]
Cash = $270,000
Accounts receivable = $550,000
Inventory = $390,000
Accounts payable = $310,000
Salaries payable = $100,000
Quick assets
= $270,000 + $550,000 = $820,000
Current liabilities
= $310,000 + $100,000 = $410,000
Quick ratio
= $820,000 / $410,000 = 2.0
[Entity 25-b]
Cash = $750,000
Accounts receivable = $510,000
Inventory = $350,000
Accounts payable = $450,000
Salaries payable = $150,000
Quick assets
= $750,000 + $510,000 = $1,260,000
Current liabilities
= $450,000 + $150,000 = $600,000
Quick ratio
= $1,260,000 / $600,000 = 2.1
[Note]
Entity 25-b is better prepared with quick assets to pay current liabilities than is Entity 25-a.
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