Review of liquidity ratios



Q44. Review of liquidity ratios
Calculate the following liquidity ratios based on the information below:
(1) Current ratio
(2) Quick ratio
(3) Working capital ratio

Cash = $350,000
Accounts receivable = $850,000
Inventory = $900,000
Property, plant and equipment = $1,700,000

Accounts payable = $520,000
Short-term borrowings = $980,000

A44.
Quick assets
= Cash + Accounts receivable
= $350,000 + $850,000
= $1,200,000

Current assets = $2,100,000
= Cash + Accounts receivable + Inventory
= $350,000 + $850,000 + $900,000
= $2,100,000

Total assets
= Cash + Accounts receivable + Inventory + Property, plant and equipment
= $350,000 + $850,000 + $900,000 + $1,700,000
= $3,800,000

Current liabilities
= Accounts payable + Short-term borrowings
= $520,000 + $980,000
= $1,500,000

Working capital
= Current assets – Current liabilities
= $2,100,000 – $1,500,000
= $600,000

(1) Current ratio
= Current assets / Current liabilities
= $2,100,000 / $1,500,000 = 1.40

(2) Quick ratio
= Quick assets / Current liabilities
= $1,200,000 / $1,500,000 = 0.80

(3) Working capital ratio
= Working capital / Total assets
= (Current assets – Current liabilities) / Total assets
= ($2,100,000 – $1,500,000) / $3,800,000
= $600,000 / $3,800,000 = 0.16

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