g Construction has a current ratio of 3.7 and a quick ratio of 1.05. Bill is get

Question

g Construction has a current ratio of 3.7 and a quick ratio of 1.05. Bill is getting ready to go the bank to ask for a loan to build yet another apartment complex. Bill is unsure of how the a. What factors, (accounts) could cause the current ratio to be so much higher than the quick 6. Bill Din bank will interpret these ratios. Bill asks you the following questions: ratio? b. Will the bank give Bill Ding Construction the loan? Why or why not? c. How can Bill Ding Construction improve the quick ratio? List specific actions to take. Module Homework 5-2

Explanation / Answer

6a.

Current ratio is calculated by using the following formula:

Current assets / current liabilities.

Quick ratio is calculated by using the following formula:

Current assets less inventories / current liabilities

The reason to state the formulas used to calculate current and quick ratio is that the formulas will to a large extent help us to understand the reason for the huge discrepancy between current ratio and quick ratio. The factors are following which generally causes current ratio to be that much higher than the quick ratio:

6b.

Since the company has very attractive current ratio, i.e. 3.7 and even the quick ratio of the company though significantly low from the current ratio however, not at all bad hence, there is no reason for the bank to not give Bull Ding the loan.

6c.

The following steps will help Bill Ding to improve its quick ratio:

Reduce the current liabilities of the organization.

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